2011 (1) TMI 923 - AT - Income Tax

Interest income whether taxable on due or receipt basis - the ld. AR submitted that the Special Bench has decided this issue in assessee s favour - ground is allowed Regarding deduction u/s 14A - in the case of Godrej & Boyce Mfg. Ltd. v. DCIT (2010 -TMI - 78448 - BOMBAY HIGH COURT) - held that disallowance of expenses is called for u/s.14A in such circumstances. However, the manner of computation of such disallowance has been restored to the file of AO for making on some reasonable basis. It has further been held in this case the provisions of Rule 8D are prospective - Appeal is allowed by way of remand Regarding deduction u/s 44C - head office expendtiture - Revised return - AO, while finalizing the assessment, noted that the said expenditure of Rs.2,18,99,306 was in the nature of general administration expenses and thus restricted it within the limits prescribed u/s.44C of the Act - it would be relevant to note that broadly there may be two types of head office expenses, viz., those incurred by the head office in common to be shared by the benefitting branches and those incurred exclusively for the Indian branch - It is in this context that the report of the TPO is relevant, which has elaborated on the correctness of the allocation of these expenses. The TPO was verifying whether the allocated costs claimed by the assessee were really incurred for its business and whether these were backed by some relevant evidence - It cannot be the converse situation to argue that the existence of the primary evidence should be presumed from such report, which is again not specific - Even if such remittance is proved in the succeeding year, the inclusion of such amount in the overall limit for sec. 44C will be justified The next two items of allocation of which have not been allowed by the TPO are out of allocation of general and administration costs, being Advertising at BD 3,390 and Others at BD 6,641 - It is not a case where the Head Office did not raise any invoice or debit note in respect of such expenses - It is made clear that the AO will work out the amount deductible u/s 44C afresh as per law by considering sum total of items ( B ) and ( C ) and shall not restrict himself only to the claim originally made by the assessee in the return - Appeal are allowed for statistical purpose

Issues Involved:
1. Taxability of interest income from securities.
2. Deletion of disallowance on account of broken period interest.
3. Deletion of addition under Section 14A for expenditure incurred in earning exempt income.
4. Deductibility of Head Office expenses and NRI desk expenses under Section 44C.

Issue-wise Detailed Analysis:

1. Taxability of Interest Income from Securities:
The first issue pertains to the taxability of interest income arising from securities. The Revenue contended that such income should be taxable on a day-to-day basis on accrual rather than on a due basis. The assessee's counsel referenced a Special Bench decision in the assessee's favor for earlier assessment years. The Departmental Representative accepted this position, and the tribunal upheld the CIT(A)'s order, deciding the issue in favor of the assessee.

2. Deletion of Disallowance on Account of Broken Period Interest:
The second issue involved the deletion of disallowance on account of broken period interest. Both parties agreed that the Special Bench of the Tribunal had previously decided this issue in favor of the assessee. Respecting this precedent, the tribunal upheld the CIT(A)'s order, rejecting the Revenue's ground.

3. Deletion of Addition under Section 14A:
The third issue concerned the deletion of addition under Section 14A, which pertains to the disallowance of expenses incurred in earning income claimed to be exempt under Section 10(33). The tribunal noted that the Special Bench had restored this matter to the Assessing Officer (AO) for a decision in line with the Special Bench order in the case of Daga Capital Management. However, the tribunal also considered a subsequent jurisdictional High Court judgment in Godrej & Boyce Mfg. Ltd. v. DCIT, which held that disallowance under Section 14A was necessary, but the computation method should be reasonable and not based on Rule 8D, which is prospective. Accordingly, the tribunal set aside the CIT(A)'s order and directed the AO to compute the disallowance following the High Court's judgment.

4. Deductibility of Head Office Expenses and NRI Desk Expenses under Section 44C:
The main issue in the appeals was the deductibility of Head Office expenses and NRI desk expenses under Section 44C. The assessee had claimed deductions for these expenses, which the AO had restricted within the limits prescribed under Section 44C. The CIT(A) allowed the deduction for Head Office expenses as per the books of account but restricted the NRI desk expenses.

The tribunal analyzed Section 44C, which limits the deduction of head office expenditure to the lower of 5% of adjusted total income or the amount attributable to the Indian branch. The tribunal distinguished between common head office expenses, which are subject to Section 44C, and exclusive expenses incurred for the Indian branch, which are deductible under regular provisions.

For the direct and exclusive NRI desk expenses, the tribunal upheld the CIT(A)'s decision to allow these in full, as they were incurred solely for the Indian branch. However, for allocated staff costs and general administration costs, the tribunal held that these should fall under Section 44C, subject to verification of evidence for specific items not accepted by the Transfer Pricing Officer (TPO).

The tribunal directed the AO to verify the evidence for the disputed items and allow deductions accordingly. The AO was instructed to compute the deductible amount under Section 44C afresh, considering both allocated and common head office expenses, rather than limiting to the original claim.

Conclusion:
The tribunal upheld the CIT(A)'s order on the taxability of interest income and broken period interest, set aside the order on Section 14A disallowance for recomputation, and provided detailed directions for the deductibility of head office and NRI desk expenses under Section 44C. The appeals were allowed for statistical purposes, with specific directions for the AO to follow.

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