2014 (1) TMI 537 - AT - Income Tax

Taxability of interest income received from Head Office Held that - The interest income received from the HO is not taxable in view of principle of mutuality the aspect of total income under the scheme of Income Tax is understood as the earning of the assessee from all the sources as classified under different heads of income reduced by the expenditure directly and indirectly incurred in relation to the earning of the income and further deducting all the allowable claims and the exemption/deduction while computing the total income - the total income chargeable to tax means the net income computed from the gross receipts after the deduction of the allowable expenditure and other deductions - the income which is chargeable to tax is computed after the deduction of the expenditure which has been incurred for earning such taxable income thus, the expenditure incurred for other than the income chargeable to tax, is not permitted to be reduced from the income for computation of the total income - This aspect of allowing the expenditure incurred in relation to the taxable income is embedded in the provisions of section 14A to ensure that the expenditure incurred in relation to the income which is not chargeable to tax shall not be allowed as deduction against the income which is chargeable to tax - the income, which is chargeable to tax is taken as net income after deduction of the allowable expenditure and similarly the income which is not chargeable to tax is also taken net and the expenditure incurred in relation to such income is reduced from it - Thus, the income, which does not form part of the total income, shall also be the net income after considering the expenditure directly or indirectly incurred in relation to earning the said income. Applicability of section 14A of the Act - Interest received from the HO is not an income - No question of exclusion from the total income Held that - Following M/s. Societe Generale Versus The Dy. Director of Income-tax (International Taxation) -2(1) Mumbai 2013 (5) TMI 374 - ITAT MUMBAI - the applicability of section 14A upheld in respect of the interest which was held to be exempt on principle of mutuality - there is no ambiguity on the issue that section 14A is applicable in respect of interest received from HO/overseas branches which is held as exempt on the principle of mutuality. Need of Investigation and examination relying upon National Thermal Power Company Limited Versus Commissioner of Income-Tax 1996 (12) TMI 7 - SUPREME Court Held that - The applicability of sec. 14A is purely a question of law arising from the finding that the interest income is not taxable and only quantum of disallowance requires the examination of the facts - the issue is only applicability of section 14A and not the computation of the quantum of disallowance thus, it cannot be said that this issue of applicability of section 14A cannot be admitted as this requires examination of the facts. Expenditure incurred u/s 37(1) of the Act - HO paid on behalf of Indian Branch office Held that - Following Commissioner of Income-Tax Versus Emirates Commercial Bank Ltd. 2003 (4) TMI 2 - BOMBAY HIGH COURT - Section 44C is applicable only in the cases of those non-residents, who carry on business in India through their branches - the expense was initially incurred by the head office which was recovered by the head office from the branch in India by raising a debit note - the expense was incurred for the branch office in India thus, section 44C has no application Decided in favour of Assessee. Deduction of expenditure on account of swap cost on un-matured contracts Held that - Following The Siam Commercial Bank PCL Versus Deputy Director of Income-tax (International Taxation)-2(1) 2011 (11) TMI 75 - ITAT MUMBAI - both transactions of sale and purchase of dollars are totally independent of each other thus, there is no question of estimating any profit or loss on such transaction in the manner in which the assessee has done so, more specifically without divulging the impact of difference in the rate of dollar as at the end of the year vis-avis that agreed as per the forward contract Decided in favour of Assessee. Disallowance u/s 40(a)(i) of the Act Held that - Following Assistant Director of Income-tax (International Taxation) 3(1) /2(2), Mumbai Versus Oman International Bank S. AOG 2012 (12) TMI 414 - ITAT MUMBAI - The assessee paid transaction charges on MOSTRO account with banks outside India Decided in favour of Assessee.

Issues Involved:
1. Taxability of interest income received from Head Office.
2. Assessment of provision made for expenditure which subsequently turned out to be in excess.
3. Deduction in respect of broken period interest paid on purchase of securities.
4. Claim of bad debts written off.
5. Expenditure incurred by the Head Office on behalf of the Indian Branch office.
6. Deduction of expenditure on account of swap cost on un-matured contracts.
7. Disallowance made under section 40(a)(i).

Issue-wise Detailed Analysis:

1. Taxability of Interest Income Received from Head Office:
The Tribunal held that the interest income received from the Head Office (HO) is not chargeable to tax, applying the principle of mutuality. This decision was based on the precedent set by the Special Bench in the case of Sumitomo Mitsui Banking Corporation. The Tribunal also addressed the additional ground raised by the revenue regarding the applicability of section 14A, which disallows expenditure incurred in relation to exempt income. The Tribunal admitted this additional ground, emphasizing that section 14A is applicable to the interest income received from the HO, which is exempt on the principle of mutuality. The matter was remanded to the Assessing Officer to determine the quantum of disallowance under section 14A.

2. Assessment of Provision Made for Expenditure:
The Tribunal upheld the decision of the Commissioner of Income Tax (Appeals) [CIT(A)] to tax the provision made for expenditure that was subsequently found to be in excess. The assessee had already received relief for this amount in the subsequent assessment year (AY 2004-05), making this issue infructuous.

3. Deduction in Respect of Broken Period Interest:
The Tribunal dismissed this ground as infructuous because the claim for deduction of broken period interest had already been allowed for the assessment year 2002-03, and the revenue did not challenge this finding.

4. Claim of Bad Debts Written Off:
The Tribunal noted that the claim of bad debts written off had already been allowed by the Tribunal for the assessment year 1995-96, rendering this issue infructuous.

5. Expenditure Incurred by the Head Office on Behalf of the Indian Branch Office:
The Tribunal found that this issue was covered by the decision of the Hon'ble jurisdictional High Court in the case of Commissioner of Income-tax v. Emirates Commercial Bank Ltd. The High Court had held that section 44C, which imposes a ceiling on head office expenses, does not apply to expenses incurred exclusively for the branch. Therefore, the Tribunal decided this issue in favor of the assessee.

6. Deduction of Expenditure on Account of Swap Cost on Un-matured Contracts:
The Tribunal followed the decision of the coordinate Bench in the case of Siam Commercial Bank PCL, which held that the swap cost on un-matured contracts is not deductible. Consequently, this issue was decided in favor of the revenue and against the assessee.

7. Disallowance Made Under Section 40(a)(i):
The Tribunal noted that this issue was covered by its earlier order in the assessee's own case for the assessment year 2001-02, where the Tribunal had decided the issue in favor of the assessee. Therefore, the Tribunal upheld the CIT(A)'s order deleting the disallowance under section 40(a)(i).

Conclusion:
The appeals filed by the assessee were partly allowed, and the Cross Objection for the assessment year 1998-99 was dismissed, while the Cross Objection for the assessment year 1999-00 was allowed. The appeals filed by the revenue for the assessment years 1998-99 and 1999-00 were partly allowed, whereas the appeals for the assessment years 2002-03 and 2003-04 were dismissed.

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