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2013 (12) TMI 718 - AT - Income TaxExpenses incurred by overseas branch Held that - Following assessee s own case for A.Y 1991-92 - If the expenses are shared/ allocated/ apportioned/ non-exclusive head office expenses then they will fall within the limits under section 44C of the Income Tax Act, 1961 (the Act) - If expenses are exclusively incurred by the head office for the Indian Branch then they shall be considered under general provisions of the Income Tax Act,1961- Expenses incurred by the bank overseas branches directly pertained to the operations and business of the Indian branches - Decided in favour of assessee. Interest paid to set off against interest received Held that - Following Aruna Mills Ltd. vs. CIT 1956 (8) TMI 45 - BOMBAY HIGH COURT - There was no nexus between the receipt of interest by the assessee company and the payment of interest under the provisions relating to payment of advance tax - The first case the assessee was being paid interest for making the advance payment and in the second case he is made to pay interest for failure to pay the advance payment - The provision for payment of interest in the Act is not as compensation for use of the money belonging to the creditor which a debtor has, but the payment is for an entirely different consideration - There was a default in complying with the statutory obligation to make advance payment of tax - The interest cannot be strictly called a penalty, it was in the nature of penalty because it was for a default - On this basis also the rule of netting was not accepted Decided against assessee. Expenses incurred Held that - Indian law limits certain deductions of a permanent establishment with respect to head office expenditures. The deduction of amounts characterized as executive and general administration expenditures (not interest) is capped at five percent of the adjusted total income of the permanent establishment - The restrictions for allowing expenses incurred by the PE being head office expenses which are covered by Sec.44C of the Act (domestic law) as well as other expenses incurred in India are within the fold of Article 7(3) of the DTAA - As far as expenses incurred in India attributable to the business carried on in India are concerned, they have to be allowed subject to the limitations provided in the Act Decided in favour of assessee. Expense on entertainment of staff members Held that - The Tribunal estimated 10% of the entertainment expenses to be attributed to the staff members entertaining the clients and accordingly allowable to that extent Partly allowed in favour of assessee. Expenses on rent, repairs and depreciation Held that - Following Britannia Industries Ltd. 2005 (10) TMI 30 - SUPREME Court - The claim of expenditure on rent, repair/depreciation on Guest House is not allowable - Decided against assessee. Amount paid to RBI Shortfall in CRR and SLR Held that - Following Assessee s own case for the assessment year 1992-93 and DCIT V/s. Dhanalakshmi Bank Ltd 2000 (8) TMI 246 - ITAT COCHIN - The interest paid to the RBI was not penalty and accordingly the interest expenditure is allowable - Decided in favour of assessee. Club membership fee Held that - Following assessee s own case in A.Y 1990-91 and Otis Elevator Co. (India) Ltd. vs. CIT 1991 (4) TMI 53 - BOMBAY High Court - The assessee is entitled to deduction on account of annual subscription paid to the clubs, in respect of its employees - Decided in favour of assessee. Interest paid to overseas branch Held that - Following Sumitomo Mitsui Banking Corpn. vs. DDIT(IT) 2013 (1) TMI 509 - ITAT MUMBAI - When the transaction between the overseas head office of the assessee and its unit in India was a transaction as between principal and principal - Any income cannot arose in favour of the assessee either directly or indirectly since the gain in overseas office was offset by the loss incurred in the Indian branch - There cannot be a valid transaction of sale between the branch office of the assessee in India and its head office - It is a elementary proposition that no person can enter into a contract with oneself and debiting or crediting one s account cannot alter this legal position. The interest paid to the overseas branch head office is an allowable deduction by virtue of provisions of DTAA and at the same time the said interest paid by the India PE is not chargeable to tax under the provisions of IT Act being income to self - Decided in favour of assessee. Expenses incurred for earning the income exempt u/s 10(15)(iv)(h) Held that - The expenditure incurred for earning the non-taxable income has to be disallowed - There may be direct expenditure incurred for earning exempt income but expenditure incurred for the composite/indivisible activities in which taxable and non-taxable income is received, then the principle of apportionment will apply - The AO has not brought out any direct expenditure incurred for earning the exempt income in question and disallowed the proportionate expenses by considering total expenditure incurred by the assessee and booked to the P&L Account - When there is no direct expenditure incurred for earning the exempt income then the apportionment of the expenditure is only for such expenditure which has been incurred for composite/indivisible activities resulting in taxable and non taxable income - The expenditure which is common for the activities for taxable and non-taxable income, the disallowance has to be considered - Section 14A was not in existence when the assessment in the said case was completed by the AO As per the provision inserted by the Finance Act, 2001 retrospectively w.e.f 01/04/1962 - The disallowance of the proportionate expenditure incurred for composite or indivisible activity in which taxable and non-taxable income is received has to be examined in the light of the provisions of Section 14A - AO has not examined the issue by considering the expenditure which is incurred for the composite/indivisible activities in which taxable/non-taxable income is received The issue was set aside for fresh consideration. Deduction u/s.36(1)(viia) and section 44C Held that - The adjusted total income for the purpose of Section 44C means total income computed in accordance with the provisions of the Act and interalia after giving effect to the deduction u/s. 36(1)(viia) - The conjoined reading of section 36(1)(viia) as well as section 44C makes shows that for computation of deduction u/s. 36(1)(viia) the deduction u/s. 44C has to be given effect and similarly for deduction u/s. 44C, deduction u/s. 36(1)(viia) has to be given effect - The deductions have to be given after calculating the income as per the provisions of the Act - Deduction u/s. 44C has to be given after taking into account deduction u/s. 36(1)(viia) and deduction u/s.36(1)(viia) has to be given after taking into account deduction u/s. 44C The view of AO is accepted Decided in favour of Revenue. Head office expenditure Held that - The assessee has claimed 5% of the adjusted total income as head office expenditure under section 44C - The assessee has filed a certificate from the head office auditors confirming head office administrative expenses - The assessee has debited the head office administrative expenses in the P&L Account at Rs.15,10,18,863/-, the AO restricted the deduction only to the extent of the amount which was debited to the P&L Account - The AO has not examined the certificate from the head office auditors regarding the actual expenditure incurred in respect of head office administrative expenses - The CIT(A) has also not examined this issue by taking into account the certificate from the head office showing actual expenses incurred The issue was restored for fresh adjudication.
Issues Involved:
1. Disallowance of expenditure incurred by overseas branches under Section 44C. 2. Disallowance of interest paid to Income Tax Authorities. 3. Disallowance of certain expenses under Article 7(3) of Indo-US Tax Treaty. 4. Disallowance of 25% of entertainment expenditure. 5. Disallowance of expenditure on rent, repairs, and depreciation for Guest House. 6. Disallowance of amounts paid to RBI for shortfall in maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Reserve (SLR). 7. Taxability of interest paid by Indian branches to Singapore branch. 8. Deletion of addition on account of club membership fees. 9. Deletion of addition on account of estimated expenditure incurred on earning interest on tax-free bonds. 10. Computation of deduction under Section 36(1)(viia) and Section 44C. Detailed Analysis: 1. Disallowance of Expenditure Incurred by Overseas Branches under Section 44C: The Tribunal considered the rival submissions and the relevant material on record. The Assessee argued that the expenses incurred by overseas branches were directly for Indian operations and should not fall under Section 44C. The Tribunal followed its earlier decisions and the decision of the Hon'ble Jurisdictional High Court, concluding that the provisions of Section 44C do not apply to expenses incurred exclusively for Indian branches. The Tribunal decided this issue in favor of the Assessee. 2. Disallowance of Interest Paid to Income Tax Authorities: The Assessee claimed deduction for interest paid to Income Tax Authorities, arguing for netting against interest received. The Tribunal, after considering the decisions of higher courts and the Third Member decision in DCIT vs. Sandvik Asia Ltd., held that the interest paid to the Income Tax Authorities cannot be netted against interest received. The Tribunal decided this issue against the Assessee. 3. Disallowance of Certain Expenses under Article 7(3) of Indo-US Tax Treaty: The Tribunal examined Article 7(3) and the technical explanation of the Indo-US DTAA. The Tribunal noted that the expenses incurred by the PE in India should be allowed subject to the limitations of the local law. The Tribunal upheld its earlier decision, holding that the restrictive provisions of the Income Tax Act apply to expenses incurred by the PE in India, and decided this issue against the Assessee. 4. Disallowance of 25% of Entertainment Expenditure: The Assessee claimed that 25% of entertainment expenses were attributable to staff members. The AO estimated an allowance of Rs. 2.00 lakhs. The Tribunal, considering the facts, allowed 10% of the entertainment expenses to be attributed to staff members and allowed this portion. 5. Disallowance of Expenditure on Rent, Repairs, and Depreciation for Guest House: The Tribunal noted that this issue was settled by the Hon'ble Supreme Court in the case of Britannia Industries Ltd., which held that such expenditures are not allowable. The Tribunal decided this issue against the Assessee. 6. Disallowance of Amounts Paid to RBI for Shortfall in Maintenance of CRR and SLR: The Tribunal followed the decision of the Hon'ble Jurisdictional High Court in the case of CIT vs. Bank of Baroda, which held that such payments are not penalties but compensatory in nature. The Tribunal decided this issue in favor of the Assessee. 7. Taxability of Interest Paid by Indian Branches to Singapore Branch: The Tribunal referred to the decision of the Special Bench in Sumitomo Mitsui Banking Corporation, which held that interest paid to the overseas branch is an allowable deduction and not chargeable to tax under the provisions of the IT Act. The Tribunal decided this issue in favor of the Assessee. 8. Deletion of Addition on Account of Club Membership Fees: The Tribunal followed its earlier decisions and the decision of the Hon'ble Jurisdictional High Court in Otis Elevator Co. India Ltd., allowing the claim for club membership fees. The Tribunal decided this issue in favor of the Assessee. 9. Deletion of Addition on Account of Estimated Expenditure Incurred on Earning Interest on Tax-Free Bonds: The Tribunal noted that the AO did not establish any direct expenditure incurred for earning the exempt income. The Tribunal set aside this issue to the AO to reconsider and decide as per law, specifically for common and indivisible expenditures. 10. Computation of Deduction under Section 36(1)(viia) and Section 44C: The Tribunal clarified that deductions under Section 36(1)(viia) and Section 44C should be computed as per the provisions of the Act, which require giving effect to each deduction before calculating the other. The Tribunal restored the AO's order on this issue. Conclusion: The Tribunal partly allowed the Assessee's appeals and partly allowed the Revenue's appeal for statistical purposes for the assessment year 1997-98, while dismissing the Revenue's appeal for the assessment year 1998-99.
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