2012 (8) TMI 371 - AT - Income Tax

Deduction of expenses incurred at the head office directly in relation to Indian branches - expenses incurred for solicitation of deposits from NRI I.E. NRI marketing expenses - Non-resident banking company assessee contended the same to be not covered by the provisions of section 44C Held that - Exclusive expenses incurred by the head office for Indian branch are outside the purview of sec. 44C and only common head office expenses are governed by this section. Once the amount is found to be incurred exclusively by H.O. towards the Indian branch, the same is required to be allowed in terms of section 37(1) without any reference to section 44C. See ADIT(I.T.) Vs. Bank of Bahrain & Kuwait (2011 (1) TMI 923 - ITAT, MUMBAI ), CIT v. Emirates Commercial Bank Limited (2003 (4) TMI 2 - BOMBAY HIGH COURT) - Decided in favor of assessee Entertainment expenses dis-allowance u/s 37(2) - assessee estimated dis-allowance at 30% whereas AO increased the dis-allowance to 80% - application of provision in Article 7(3) of the India-USA DTAA - Held that - Qualification in Article 7(3) of the DTAA that the expenses will be allowed in accordance with the provisions of and subject to the limitations of the taxation laws of that State applies to all expenditure incurred for the business of the PE and not merely to Section 44C alone. It, therefore, follows that the deductibility of expenses in assessee s case is subject to the relevant provisions including section 37(2) under the provisions of DTAA. Dis-allowance computed at 50 %. The fact that the assessee s interpretation was accepted in earlier year does not mean that it cannot be departed with when several orders have been subsequently rendered by various benches of the Tribunal taking contrary view. Dis-allowance u/s 14A - Interest on tax free bonds gross interest claimed as exempt u/s 10(15)(iv) assessee contended that provisions of section 14A are not applicable where the shares are held as stock in trade - Held that - Here assessee has tried to make out a case that main purpose of the holding of shares was to earn income from sale and the dividend income was just incidental to such holding. Section 14A talks of making dis-allowance of expenses incurred in relation to an income not chargeable to tax. No exception, such as the dividend being main or incidental income, has been carved out in the provision. The relation of expenses for dis-allowance is with the exempt income irrespective of the source or nature of the exempt income. When the legislature in its wisdom has not spelt out any exception coming in the way of applicability of section 14A, it is wholly impermissible to artificially find any such exception contrary to the language of the provision and the intention of the legislature. Dis-allowance u/s 14A is warranted Decided against assessee. Dis-allowance u/s 14A - expenditure attributable to earning the interest income and dividend liable to tax at special rate u/s 115A Held that - Judgment of Supreme Court in Rajasthan State Warehousing Corporation (2000 (2) TMI 5 - SUPREME COURT ) is authority for the proposition that if an assessee is carrying an indivisible business then the entire expenditure including that which was incurred for earning the tax free income would be a permissible deduction. What has been inhibited by section 14A is the deduction of expenses incurred by the assessee in relation to income not at all chargeable to tax and not the income chargeable to tax at lower rate of tax. Therefore, deduction allowed against the income chargeable to tax at the regular rate of tax Decided against Revenue. Club expenses dis-allowance Held that - Issue covered in favour of the assessee. See Otis Elevator Co. (India) Ltd. v. CIT 1991 (4) TMI 53 - BOMBAY HIGH COURT

Summary

Issues Involved:
1. Disallowance of expenses for solicitation of deposits from non-resident Indians and head office expenses under Section 44C.
2. Disallowance of entertainment expenses under Section 37(2).
3. Disallowance of estimated expenses related to tax-free interest on bonds under Section 14A.
4. Deductibility of expenses attributable to earning interest and dividend income under Section 115A.
5. Disallowance of club expenses.

Issue-wise Detailed Analysis:

1. Disallowance of Expenses for Solicitation of Deposits from Non-resident Indians and Head Office Expenses under Section 44C:
The assessee, a non-resident banking company, claimed deductions for head office and NRI marketing expenses. The Assessing Officer (AO) restricted the deductions to 5% of the gross total income under Section 44C, leading to disallowance. The CIT(A) sustained these disallowances. However, the Tribunal noted that the Hon'ble Bombay High Court had previously ruled in favor of the assessee for a similar issue, holding that such expenses were covered under Section 37(1) and not Section 44C. The Tribunal observed that the expenses in question were exclusive and not common, thus should be allowed under Section 37(1). Consequently, the assessee's appeal on this issue was allowed.

2. Disallowance of Entertainment Expenses under Section 37(2):
The assessee estimated a 30% disallowance for entertainment expenses, which the AO increased to 80%. The CIT(A) upheld the AO's decision. The Tribunal noted conflicting decisions in similar cases and examined the legal position. It concluded that the disallowance should be computed by taking 50% of the total expenses towards entertainment, following the precedent set by the Karnataka High Court. The assessee's appeal was partly allowed.

3. Disallowance of Estimated Expenses Related to Tax-free Interest on Bonds under Section 14A:
The AO disallowed proportionate expenses for earning tax-free interest, which the CIT(A) deleted. The Tribunal noted that Section 14A, inserted retrospectively, governs the non-deductibility of such expenses. It held that the AO's action was in line with Section 14A, and directed the AO to compute the disallowance on a reasonable basis as per the mandate of the Hon'ble jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd. The Revenue's appeal was allowed to this extent.

4. Deductibility of Expenses Attributable to Earning Interest and Dividend Income under Section 115A:
The AO computed proportionate expenses for earning income liable to tax under Section 115A and omitted to disallow these expenses against income chargeable at normal rates. The CIT(A) ruled in favor of the assessee. The Tribunal held that the assessee is entitled to deduction of these expenses against income chargeable at normal rates, following the principle that Section 14A does not apply to income chargeable at a lower rate. The Revenue's appeal on this issue was dismissed.

5. Disallowance of Club Expenses:
The AO disallowed club expenses, which the CIT(A) deleted. The Tribunal found the issue covered in favor of the assessee by the jurisdictional High Court's judgment in Otis Elevator Co. (India) Ltd. v. CIT and the Madras High Court's judgment in CIT v. Sundaram Industries Ltd. The Revenue's appeal on this issue was not allowed.

Conclusion:
Both the assessee's and the Revenue's appeals were partly allowed. The Tribunal provided detailed rulings on each issue, ensuring compliance with relevant legal precedents and statutory provisions.