2012 (8) TMI 397 - AT - Income Tax

Interest from Head Office credited to the P&L Account - addition - Non-resident banking company - assessee contended the same to be non-taxable on ground that one cannot earn income from its own self - Held that - Issue is covered in favor of assessee by decision of Special Bench in the case of Sumitomo Mitsul Banking Corpn. Vs. DDIT(IT)(2012 (4) TMI 80 - ITAT MUMBAI). Addition cannot be sustained - Decided in favor of assessee Bad debt - opening balance of the provision for bad debt was adjusted against the written off amount and remaining amount of bad debts was claimed - revenue was of the view that the assessee is entitled to a provision for bad debt u/s 36(1)(vii)(a) which is equal to 5% of the total income before deduction allowable under Chapter-VI - Held that - Issue has been decided in favor of assessee in preceding years wherein it was held that if bad debts are written off in the books of account during the course of the previous year, such bad debts be deducted as admissible u/s 36(1)(vii) before quantifying the assessee s total income for the purpose of clause (viia) - Decided in favor of assessee Head Office expenses viz traveling expenses claimed by assessee as deduction u/s 37 - Revenue contending application of Section 44C - Held that - As the travelling expenses have been incurred by the head office on travel of its own staff and directly related to the business of the Indian Branch, hence we hold that section 44C is not applicable and these are allowable u/s 37(1) - Decided in favor of assessee Prior-period interest expenses - certain term deposit interest wrongly accrued on simple interest basis rather than on compound interest - additional interest claim during assessment proceedings - Revenue contending that deduction not made in the return cannot be entertained by AO otherwise than by filing a revised return - Held that - Impugned amount claimed by the assessee is not a deduction but it is an expenditure. It is not the case of the revenue that these expenditures are not allowable in the regular course of business of the assessee. The claim is supported by the audit report. Therefore, we are of the opinion, that CIT(A) has rightly granted relief to the assessee - Decided in favor of assessee

Issues Involved:

1. Taxability of interest received from Head Office.
2. Adjustment of closing provision under Section 36(1)(viia) against bad debts written off.
3. Deduction of bad debts disallowed in previous years.
4. Deduction of expenses incurred by Head Office for Indian branches under Section 37 and Section 44C.
5. Additional interest payable on deposits claimed based on a tax audit report.
6. Condonation of delay in filing appeals by the revenue.

Issue-Wise Analysis:

1. Taxability of Interest Received from Head Office:
The assessee, a non-resident banking company, contended that interest received from its Head Office should not be taxable, arguing that one cannot earn income from oneself. The CIT(A) upheld the AO's decision to include this interest in taxable income. However, the Tribunal referred to the Special Bench decision in Sumitomo Mitsul Banking Corp., which clarified that under domestic law, a PE and its GE are not independent entities, and thus, interest payable by the Indian PE to its overseas GE is not taxable as it is considered a payment to oneself. Respectfully following this decision, the Tribunal allowed the assessee's ground for both years.

2. Adjustment of Closing Provision under Section 36(1)(viia) Against Bad Debts Written Off:
The AO adjusted the opening balance of the provision for bad debts against the bad debts written off and allowed the remaining amount. The CIT(A) upheld this decision. The Tribunal, referring to its earlier decision in the assessee's own case, held that the deduction for bad debts should be allowed without adjusting the opening balance of the provision account. The Tribunal directed the AO to allow the full claim of bad debts for both years.

3. Deduction of Bad Debts Disallowed in Previous Years:
For AY 1996-97, the assessee's claim for deduction of bad debts disallowed in AY 1995-96 was rendered infructuous as the Tribunal had already allowed the deduction in AY 1995-96. For AY 1997-98, the Tribunal allowed the deduction for bad debts, following its earlier decision.

4. Deduction of Expenses Incurred by Head Office for Indian Branches:
The AO disallowed the deduction of direct expenses incurred by the Head Office, treating them as general administrative expenses under Section 44C. The Tribunal, referring to the Bombay High Court's decision in CIT vs. Emirates Commercial Bank Ltd., held that direct expenses incurred for the Indian branches are not covered by Section 44C but are allowable under Section 37. Consequently, the Tribunal allowed the assessee's ground for AY 1997-98.

5. Additional Interest Payable on Deposits Claimed Based on Tax Audit Report:
The CIT(A) directed the AO to allow the deduction of additional interest payable on deposits for both years, based on the tax audit report. The revenue contended that such claims should be made through a revised return as per the Supreme Court's decision in Goetze (India) Ltd. The Tribunal, however, held that the CIT(A) rightly granted relief as the claim was supported by the audit report and was allowable in the regular course of business. The Tribunal dismissed the revenue's ground for both years.

6. Condonation of Delay in Filing Appeals by the Revenue:
The revenue's appeals were filed with a delay of 3 years 10 months and 28 days. The Tribunal condoned the delay, noting that the original appeal covering both years was filed within the time limit, and separate appeals were filed as per the Tribunal's directions.

Conclusion:
The Tribunal partly allowed the assessee's appeals for both assessment years and dismissed the revenue's appeal for AY 1996-97 while partly allowing the revenue's appeal for AY 1997-98. The detailed analysis of each issue, along with the relevant legal precedents, led to a comprehensive adjudication of the appeals.

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