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2012 (11) TMI 499 - AT - Income TaxDeduction for head office expenses towards Indian branch - Held that - Once the amount is found to be exclusive expenditure incurred by the head office towards the Indian branch, the same is required to be allowed in terms of Sec 37(1), without clubbing it with shared head office expenses as per sec. 44C. Accordingly, we hold that no adverse inference can be drawn against the assessee on this issue and such exclusive expenses incurred by the assessee are required to be allowed as deduction u/s 37(1) without any reference to section 44C. In favour of assessee Disallowance of expenses towards earning exempt income Whether Sec. 14A is applicable on securities on which exempt income was earned held as stock-in-trade - Assessee is an Indian branch of foreign bank - Interest was claimed as exempt u/s 10(15)(iv) earned on tax free bonds - Held that - Following the decision in case of Godrej & Boyce Mfg. Co. Ltd. (2010 (8) TMI 77 - BOMBAY HIGH COURT) that contention raised by the assessee for not applying the provisions of 14A is not accepted. Issue remits back with direction to decides on the basis of above mention judgment. Issue remand back to AO Disallowance of expenses towards earning interest & dividend income Whether provision of Sec. 14A is applicable where income is chargeable to tax on gross basis at special rate u/s 115A - Held that - Following the decision in case of Rajasthan State Warehousing Corporation (2000 (2) TMI 5 - SUPREME COURT) 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. Section 14A does not provide that if income is liable to tax at a lower rate then also the proportionate expenditure should not be allowed as deduction against the other business income. 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. In favour of assessee Assessee received from and paid interest to overseas branches Whether the provision of interest by a PE of a foreign enterprise payable to HO and/or other branches outside India is allowable deduction - AO argued that assessee is covered by section 9(1)(v)(c) - Interest paid by the HO is taxable in India - Held that - Following the decision in case of ABN AMRO BANK, N.V. (2005 (8) TMI 294 - ITAT CALCUTTA-E) neither any deduction is allowed for the interest paid to HO or foreign branches nor income is recognized in respect of the interest earned in transactions between the HO and PE. Therefore we hold that hold that no deduction be allowed for interest paid to HO at ₹ 19,09,987 and at the same time no income can be taxed on account of interest earned from HO. Issue of assessee partly allowed in favour of assessee Disallowance of deduction claimed u/s 43D - In respect of interest on bad or doubtful debts where assessee is a Scheduled Bank - AO argued that the claim of the assessee is not tenable because the assessee has credited such amount in the RFDI Account Held that - Assessee is entitled to claim of such interest u/s 43D and the claim of the assessee cannot be rejected simply on the ground that interest has been credited on such type of debts in the reserve account. However, for the verification of the figures, we direct the AO to see that what has actually received by the assessee during the year has been offered to tax. Issue decides in favour of assessee and remand back to AO Interest Tax Act. 1974 Interest Tax on amount of interest received - Interest on non-performing assets as described in section 43D can be assessed only in a condition that either they are credited to P&L Account or it is actually received - Whatever interest is actually received on such assets is taxable Held that - AO has to recompute the assessable interest after giving the assessee a reasonable opportunity of hearing and if there is incorrectness in the interest computed as assessable the same may also be removed. Issue decides in favour of assessee & remand back to AO
Issues Involved:
1. Disallowance of expenses incurred at the head office for Indian branches. 2. Disallowance of expenses incurred for solicitation of deposits from non-resident Indians. 3. Disallowance of expenditure incurred for earning interest on tax-free bonds. 4. Disallowance of expenditure incurred for earning interest on foreign currency loans. 5. Disallowance of notional expenditure for earning dividend income. 6. Disallowance of exemption claimed for interest income earned on funds placed with foreign branches and taxation of interest paid to foreign branches. 7. Disallowance of deduction claimed under section 43D for interest on bad or doubtful debts. 8. Double taxation of interest on bad or doubtful debts under the Interest Tax Act. Detailed Analysis: 1. Disallowance of Expenses Incurred at the Head Office for Indian Branches: The Tribunal noted that the issue of disallowance of head office expenses was previously decided in favor of the assessee by the Hon'ble Bombay High Court in the case of CIT v. Emirates Commercial Bank Limited. The Tribunal held that the expenses incurred exclusively for the Indian branch are to be allowed under section 37(1) and not under section 44C. Consequently, the Tribunal allowed the assessee's appeal on this ground. 2. Disallowance of Expenses Incurred for Solicitation of Deposits from Non-Resident Indians: Similarly, the Tribunal observed that the expenses incurred for solicitation of deposits from non-resident Indians were also considered in the earlier assessment years and decided in favor of the assessee. The Tribunal reiterated that such expenses are exclusive to the Indian branch and should be allowed under section 37(1). Therefore, this ground was also allowed. 3. Disallowance of Expenditure Incurred for Earning Interest on Tax-Free Bonds: The Tribunal referred to the case of Dresdner Bank AG v. Addl. CIT, where it was held that section 14A applies to the expenditure incurred for earning tax-free income. The Tribunal directed the Assessing Officer to compute the disallowance under section 14A on a reasonable basis, following the precedent set by the Hon'ble Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. v. DCIT. The matter was restored to the file of the AO for fresh computation, and this ground was allowed for statistical purposes. 4. Disallowance of Expenditure Incurred for Earning Interest on Foreign Currency Loans: The Tribunal found that the issue of disallowance of expenses for earning interest on foreign currency loans was similar to the disallowance of expenses for earning tax-free interest. The Tribunal directed the AO to recompute the disallowance under section 14A on a reasonable basis, similar to the direction given for tax-free bonds. This ground was also allowed for statistical purposes. 5. Disallowance of Notional Expenditure for Earning Dividend Income: The Tribunal noted that the issue of notional expenditure for earning dividend income was covered by the earlier decision in the case of Godrej & Boyce Mfg. Co. Ltd. The Tribunal directed the AO to recompute the disallowance under section 14A on a reasonable basis. This ground was allowed for statistical purposes. 6. Disallowance of Exemption Claimed for Interest Income Earned on Funds Placed with Foreign Branches and Taxation of Interest Paid to Foreign Branches: The Tribunal referred to its earlier decision in the assessee's own case for A.Y. 1991-92, where it was held that interest received from and paid to foreign branches should not be taxed, following the Special Bench decision in ABN Amro Bank NV v. Asstt. DIT. The Tribunal held that no deduction should be allowed for interest paid to the head office, and no income should be recognized for interest earned from the head office. This ground was partly allowed. 7. Disallowance of Deduction Claimed Under Section 43D for Interest on Bad or Doubtful Debts: The Tribunal observed that the assessee is a Scheduled Bank, and section 43D allows the taxation of interest on bad or doubtful debts only when it is credited to the P&L Account or actually received. The Tribunal directed the AO to verify the figures and ensure that only the interest actually received is taxed. This ground was allowed for statistical purposes. 8. Double Taxation of Interest on Bad or Doubtful Debts Under the Interest Tax Act: The Tribunal held that interest on non-performing assets should be taxed only when it is credited to the P&L Account or actually received, as per section 43D. The Tribunal directed the AO to recompute the assessable interest under the Interest Tax Act, ensuring that there is no double taxation. This ground was allowed for statistical purposes. Conclusion: The appeals were partly allowed for statistical purposes, with directions to the AO for fresh computation and verification of figures as per the Tribunal's observations.
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