2014 (1) TMI 191 - AT - Income Tax

Interest paid to and received from Head Office Held that - Following Sumitomo Mitsui Banking Corporation V/s Dy.DIT (IT) 2012 (4) TMI 80 - ITAT MUMBAI - Indian Branch of Foreign Bank being part of Foreign Bank was not separate and distinct taxable entity in India as per the domestic law - It was foreign bank i.e. Head Office which was taxable entity in India - The interest received by Indian Branch of foreign bank from its head office therefore does not give rise to any income which is taxable in India because one could not make profit out of itself - No deduction with respect to interest paid by the assessee Branch of the assessee-company to its Head Office is to be allowed - The DRT in its direction has also directed AO to verify that the assessee itself made disallowance in the return of income filed - Decided in favour of assessee. Transactions charges on Nostro Account u/s 40(a)(i) Held that - Following assessee s own case for A.Y. 2005-06 - The transaction charges paid on Nostro Account were in the nature of bank charges for maintaining the accounts with banks outside India - These charges were recovered directly by way of debits to the concerned accounts of the assessee with these banks and the same represented business income of those banks which accrued/arisen outside India - No tax was required to be deducted at source from the transaction charges paid on Nostro account - Decided in favour of assessee. Expenses specifically incurred by HO for Indian branches Held that - Following assessee s own case for A.Y. 2005-06 - The traveling expenses incurred by the Head Office on traveling of its own staff are directly in connection with Indian branch and are allowable u/s 37(1) of the Act - Section 44C has no application to such expenses Decided in favour of assessee. Expenses incurred on employee of the bank Held that - In the appointment letter of the employee from Oman office allowances which were to be paid to him as well as the description of work is stated. On perusal of the said letter it is observed that he has to work on full time basis for a period of two years at Mumbai Branch. Not only this we observe that Shri Zakariya also filed return of income in India for the assessment year 2006-07 - The said expenses paid to him could not be considered a part of section 44C and the same are to be allowed u/s 37 of the Act Decided in favour of assessee. Taxability of year-end provision Held that - The assessee made excessive provision for expenses - Provision for excessive expenditure was made in accordance with regular method of accounting followed by it The excess provision was disallowed on the condition that when the assessee reverse the excess provision the said amount should not be charged to tax in the subsequent years Decided against assessee. Reversal of excess provision Held that - The AO while discussing the said amount stated that the sum of Rs.58, 948/- on account of reversal of excess provision expenses taxed in assessment year 2005-06 is reduced from total income for assessment year 2006-07 - The DRP also directed the AO to verify the above claim if found credited and make necessary adjustment to the credit to the total income - The AO has not deducted the said amount - The issue was restored for fresh adjudication. Credit of TDS Held that - The AO while giving effect to the direction of DRP has not complied with the directions - The assessment order passed by AO is a non-speaking order and only contains computation without giving reasons - The issue was restored for fresh adjudication. Refund of income tax along with interest Held that - AO has not considered the direction of the DRP nor any discussion is made in the assessment order as the order of the AO is a non-speaking order - The issue was restored for fresh adjudication. Carry forward of business loss and unabsorbed depreciations Held that - The AO failed to follow the directions of DRP - The claim of the assessee be examined and subject to verification to allow carry forward of business loss and unabsorbed depreciations if permissible /allowable under the Income Tax Act/Rules - The AO while passing the final assessment order after considering the recommendation of DRP has neither cared to consider the DRP direction nor given effect to the direction of the DRP The issue was restored for fresh adjudication.

Issues Involved:
1. Taxability of interest received from Head Office.
2. Disallowance of interest paid to Head Office under section 40(a)(i).
3. Disallowance of transaction charges on Nostro Account under section 40(a)(i).
4. Deduction of expenses incurred by Head Office for Indian branches under section 37.
5. Disallowance of expenses incurred on an employee deputed to India.
6. Taxation of year-end provision for expenses.
7. Reversal of excess provision taxed in the previous year.
8. Granting of refund determined under the assessment order.
9. Interest on refund under section 244A.
10. Carry forward of business loss and unabsorbed depreciation.

Detailed Analysis:

1. Taxability of Interest Received from Head Office:
The assessee, a non-resident bank with branches in India, credited Rs. 24,14,208/- as interest received from its Head Office in its profit and loss account but reduced this amount from taxable income, claiming it as non-taxable since it was interest received from self. The AO disagreed and included the interest in taxable income. The Dispute Resolution Panel (DRP) upheld the AO's decision. However, the Tribunal referenced a previous decision in the assessee's own case and the Special Bench decision in Sumitomo Mitsui Banking Corporation, concluding that interest received from the Head Office does not give rise to taxable income in India. Thus, the addition of Rs. 24,14,208/- was deleted.

2. Disallowance of Interest Paid to Head Office under Section 40(a)(i):
The assessee added back Rs. 1,37,58,736/- of interest paid to its Head Office, stating it was not claimed as a deduction. The AO accepted this but disallowed the deduction under section 40(a)(i) due to non-deduction of TDS. The Tribunal confirmed no deduction is to be allowed for the interest paid to the Head Office, emphasizing the need for AO to verify that no double disallowance occurs if the assessee itself made the disallowance.

3. Disallowance of Transaction Charges on Nostro Account under Section 40(a)(i):
The AO disallowed Rs. 4,20,438/- of transaction charges on Nostro Account under section 40(a)(i). The Tribunal noted that similar issues in previous years were decided in favor of the assessee, recognizing these charges as bank charges for maintaining accounts outside India and not subject to TDS. Thus, the disallowance was deleted.

4. Deduction of Expenses Incurred by Head Office for Indian Branches under Section 37:
The AO disallowed Rs. 7,32,941/- claimed as expenses incurred by the Head Office for Indian branches, treating them under section 44C. The Tribunal referenced previous decisions, including the jurisdictional High Court's ruling, which allowed such expenses under section 37(1). Consequently, the disallowance was deleted.

5. Disallowance of Expenses Incurred on an Employee Deputed to India:
The AO treated Rs. 17,42,363/- incurred on an employee deputed to India as Head Office expenses. The Tribunal found that the employee worked full-time in India and his salary was taxed in India. Thus, the expenses were allowed under section 37, not section 44C.

6. Taxation of Year-End Provision for Expenses:
The AO added back Rs. 2,47,180/- as excess provision for expenses. The Tribunal upheld this but directed that the amount should not be taxed again in subsequent years when reversed.

7. Reversal of Excess Provision Taxed in the Previous Year:
The AO failed to reduce Rs. 58,948/- from total income, which was previously taxed. The Tribunal directed the AO to verify and allow the deduction if already taxed in the preceding year.

8. Granting of Refund Determined under the Assessment Order:
The AO did not grant a refund of Rs. 6,85,010/- despite DRP's directions. The Tribunal directed the AO to comply with the DRP's directions and grant the refund after verification.

9. Interest on Refund under Section 244A:
The AO granted interest on refund only till the date of the assessment order. The Tribunal directed the AO to grant interest till the date of receipt of the refund order, per DRP's directions.

10. Carry Forward of Business Loss and Unabsorbed Depreciation:
The AO did not follow DRP's direction to examine and allow the carry forward of business loss and unabsorbed depreciation. The Tribunal restored the issue to the AO for verification and proper allowance.

Cross-Objection by Department:
The Tribunal dismissed the department's cross-objection, stating that the department cannot file cross-objections against the assessment order.

Conclusion:
The appeal of the assessee was partly allowed, and the cross-objection by the department was dismissed. The Tribunal directed the AO to follow the DRP's directions and verify claims where necessary.

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