2013 (11) TMI 522 - AT - Income Tax

Disallowance u/s 40(a)(i) - Deduction for fees paid to Master Card - Held that - The assessee in this case has made certain payments to US company for allowing use of certain services, etc. in India - US companies; as per the own admission of the learned counsel for the assessee, have chosen to agree with the contention of the Income-tax department that they are liable to pay tax under the Indian Income-tax Act. These US companies have also remitted the amount of income-tax - Deduction, if any, can be allowed, only in the year in which the tax has been paid or deducted under Chapter XVII-B. As in the impugned assessment year no tax has been deducted while remitting these amounts to companies situated outside India, we hold that the first appellate authority was right in upholding the disallowance made by the Assessing Officer - Similar view has also been adopted by the Tribunal in assessee s previous case alo - Therefore, matter decided in favour of Revenue. Disallowance of deduction in respect of New York Branch State Franchise, Tokyo Branch business tax and pre factural municipal tax - Documentry evidence not produced to prove payments - Held that - CIT(A) has given direction to the AO to verify the claim and allow the claim on the basis of actual payment in respect of taxes paid relating to assessee s New York and Tokyo Branch and hence, there is no grievance of the assessee - Therefore, decided in favour of Revenue. Disallowance u/s 14A - Expenses incurred in relation to exempt income - Disallowance of expenditure of 0.5% of average investments - Held that - disallowance made by the AO by following 12% of the income as expenses is not justified and is not based on any rational basis. There is no dispute to the fact that for making the disallowance u/s.14A of the Act, the expenditure which is related to the income which does not form part of total income under the Act has to be identified. AO has to identify the expenditure which can reasonably said to have been incurred on tax exempt income before making any disallowance u/s.14A of the Act - Assessee in the assessment for the year 2003-04 has stated that the disallowance of 0.5% of tax free income would be reasonable - It is prudent to restore this issue to the file of AO with a direction to make reasonable disallowance u/s.14A as per law and taking into consideration the details as may be filed by the assessee and the decisions of the coordinate benches that may be relied upon before him - Decided against Revenue for statistical purposes. Disallowance of fees paid to Master Card International - Whether CIT (A) erred in setting aside this issue to the AO with a direction to allow as per law after verification of taxes paid - Held that - Assessee bank has paid to Master Card International without deducting tax. Hence, AO is justified in disallowing the payments. However, CIT(A) has directed the AO to verify the claim of the assessee regarding taxes paid in this year under consideration in respect of earlier years and allow them as per law - there is no discussion on this issue in the assessment order but CIT(A) has given the direction to the AO to allow the claim as per law on verification and there should be no grievance to the assessee on it - Decided in favour of Revenue.

Summary

Issues Involved:

1. Disallowance of deduction for fees paid to MasterCard.
2. Disallowance of losses incurred.
3. Disallowance of expenses of Jakarta office.
4. Disallowance of New York Branch State Franchise Tax and Tokyo Branch Business Tax.
5. Disallowance of expenses under section 14A.
6. Disallowance of fees paid to MasterCard International.
7. Application of Minimum Alternate Tax (MAT) under section 115JA.
8. Exclusion of profits of foreign branches from total income.

Issue-wise Detailed Analysis:

1. Disallowance of deduction for fees paid to MasterCard:
The assessee paid US$ 278,885.75 to MasterCard International, equating to Rs.119.47 lakhs, without deducting tax at source. The AO disallowed the claim under section 40(a)(i) of the Income-tax Act. The CIT(A) upheld this decision, referencing earlier ITAT orders in the assessee's own case. The Tribunal noted that the issue was consistently decided against the assessee in previous years and found no evidence that taxes were paid by the payee. Thus, the Tribunal upheld the CIT(A)'s order and rejected the assessee's ground.

2. Disallowance of losses incurred:
The assessee did not press for Ground No.2 regarding the disallowance of losses amounting to Rs.17,21,15,970. Consequently, the Tribunal dismissed this ground as not pressed.

3. Disallowance of expenses of Jakarta office:
Similarly, the assessee did not press for Ground No.3 concerning the disallowance of expenses of Rs.42,21,790 related to the Jakarta office. This ground was also dismissed as not pressed.

4. Disallowance of New York Branch State Franchise Tax and Tokyo Branch Business Tax:
The assessee claimed deductions for taxes paid by its New York and Tokyo branches, which were disallowed by the AO due to lack of documentary evidence. The CIT(A) directed the AO to verify the actual payments and allow the claims accordingly. The Tribunal agreed with the CIT(A) and found no reason for the assessee to have any grievance since the CIT(A) had already directed verification and allowance of the claims based on actual payments.

5. Disallowance of expenses under section 14A:
The AO disallowed Rs.13,18,63,913 under section 14A related to exempt income. The CIT(A) directed the AO to disallow 0.5% of the average investment for expenses on account of earning exempt income. The Tribunal referred to its earlier orders and restored the matter to the AO to determine a reasonable disallowance under section 14A, considering the details provided by the assessee and relevant decisions of coordinate benches.

6. Disallowance of fees paid to MasterCard International:
The assessee claimed deductions for fees paid to MasterCard/Visa International for previous years, which were disallowed under section 40(a)(i) due to non-deduction of tax at source. The CIT(A) directed the AO to verify the taxes paid and allow the deductions as per law. The Tribunal upheld the CIT(A)'s direction for verification and allowance of claims based on actual payments.

7. Application of Minimum Alternate Tax (MAT) under section 115JA:
The assessee requested that its income be computed under normal provisions instead of section 115JA, as it would result in higher income. The Tribunal agreed with the department that this ground did not arise from the CIT(A)'s order and advised the assessee to appeal if it had grievances with the AO's computation after giving effect to the CIT(A)'s order.

8. Exclusion of profits of foreign branches from total income:
The department appealed against the exclusion of Rs.63.03 crore profits from foreign branches. Both parties conceded that this issue was covered in favor of the assessee by earlier Tribunal orders. The Tribunal upheld the CIT(A)'s decision to exclude the profits of foreign branches from the total income, following the precedent set in previous years.

Conclusion:
The Tribunal allowed the assessee's appeal in part for statistical purposes and dismissed the department's appeal. The Tribunal's decision was pronounced in the open court on 8th May 2013.