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2010 (11) TMI 709 - AT - Income TaxDTAA - Disallowance - Administrative expense and overseas taxes paid - it was noticed by the Assessing Officer that the assessee has debited an amount of Rs. 85,36,04,000 in its profit and loss account in respect of overseas taxes paid, out of which Rs. 24,89,36,449 represented overseas tax liability which has remained unpaid - Learned counsel has also contended that in any event, we must allow deduction in respect of state Income-taxes paid in USA and Canada as relief is not admissible in respect of the same in respective tax treaties - It is important to bear in mind the fact that so far as section 91 is concerned, it does not discriminate between taxes levied by the Federal Governments and taxes levied by the State Government - on the facts of the present case and bearing in mind the fact that the Federal Income-tax in USA at the relevant point of time was lesser in rate at 35 per cent vis-a-vis 38.5 per cent Income-tax rate applicable in India, the admissible double taxation relief under section 91 will be higher than relief under the tax treaty - Decided against the assessee Regarding Administrative expense - in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT 2010 -TMI - 78448 - BOMBAY HIGH COURT), even prior to assessment year 2008-09, when Rule 8D was not applicable, the Assessing Officer has to enforce the provisions of sub-section (1) of section 14A, (and) for that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act - since the assessee has not incurred any expenses in earning this dividend income, no disallowance can be made under section 14A - Appeal is allowed for statistical purpose
Issues Involved:
1. Deduction of overseas taxes paid. 2. Disallowance of interest expenses under section 14A. 3. Disallowance of administrative expenses under section 14A. Issue-wise Detailed Analysis: 1. Deduction of Overseas Taxes Paid: The core issue revolves around the appellant Assessing Officer challenging the CIT(A)'s deletion of the disallowance of Rs. 67.89 crores in respect of overseas taxes paid. The assessee, primarily an investment company, also engaged in software exports and engineering consultancy, claimed a deduction of Rs. 67,89,30,514 for overseas taxes paid. The Assessing Officer disallowed this deduction, arguing that income tax, whether paid in India or abroad, is an application of income, not a charge on income, and thus not deductible under section 37. The CIT(A) upheld the assessee's claim, relying on previous Tribunal decisions and the Bombay High Court's rejection of the reference under section 256(2). The Tribunal discussed the fundamental principles of international taxation, emphasizing that income tax paid abroad is an appropriation of income, not a charge on income. The Tribunal also highlighted the legislative amendment by Finance Act, 2006, which inserted Explanation 1 to section 40(a)(ii), clarifying that any sum eligible for relief under sections 90 or 91 is included in the term "tax." The Tribunal concluded that allowing the deduction of overseas taxes, while also claiming tax credits under sections 90 or 91, would result in a double benefit to the assessee, contrary to the scheme of the Act. Consequently, the Tribunal upheld the Assessing Officer's disallowance of Rs. 67.89 crores, vacating the relief granted by the CIT(A). 2. Disallowance of Interest Expenses Under Section 14A: The appellant Assessing Officer contested the CIT(A)'s decision to reduce the disallowance of interest expenses from Rs. 30.62 crores to Rs. 30.35 crores. The Tribunal noted that the learned counsel for the assessee conceded this point. Therefore, the Tribunal vacated the relief granted by the CIT(A) and restored the disallowance to Rs. 30.62 crores. 3. Disallowance of Administrative Expenses Under Section 14A: The Assessing Officer also challenged the CIT(A)'s deletion of the disallowance of Rs. 1.58 crores towards administrative expenses for earning dividend income. The CIT(A) had deleted this disallowance based on the Bombay High Court's judgment in the case of CIT v. General Insurance Corpn. of India (No. 1), which stated that salary expenses are not directly relatable to earning dividend income. However, the Tribunal referred to the Bombay High Court's observations in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT, which emphasized that the Assessing Officer must determine the expenditure incurred in relation to income that does not form part of the total income under the Act. The Tribunal decided to remit the matter back to the Assessing Officer for fresh adjudication in light of the Godrej & Boyce Mfg. Co. Ltd. case. The Tribunal instructed the Assessing Officer to adopt a reasonable basis or method consistent with all relevant facts and circumstances, providing the assessee with a fair opportunity to present all germane material. Conclusion: The Tribunal allowed the appeal in part, upholding the disallowance of Rs. 67.89 crores in respect of overseas taxes paid and restoring the disallowance of interest expenses to Rs. 30.62 crores. The Tribunal remitted the issue of administrative expenses back to the Assessing Officer for fresh adjudication, allowing the assessee to present all relevant arguments and evidence.
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