2014 (4) TMI 733 - AT - Income Tax

Allowability of deduction u/s 44C of the Act Head office expenses Held that - The expatriates are paying full tax on their global salary in India - The expenses incurred by the Head Office is an expenses of the branch as the expatriates working in India are rendering services to the branch in India Relying upon Kedarnath Jute Manufacturing Company Limited Versus Commissioner of Income-Tax (Central), Calcutta 1971 (8) TMI 10 - SUPREME Court - there is no requirement for raising debit note or voucher by the head office on the branch for claiming deduction u/s 44C of the Act thus, there was no infirmity in the order of CIT(A) deleting the disallowance of expatriate salary Decided against Revenue. Deletion of disallowance u/s 40(a)(ia) of the Act Held that - The decision in Abn Amro Bank NV. Versus Assistant Director Of Income-tax, International Taxation-i. 2005 (8) TMI 294 - ITAT CALCUTTA-E followed - interest paid by the Indian Branch of the assessee bank to its overseas head office is not chargeable to tax in India - the provisions of Section 195 consequently would not be attracted in case of such payment of interest by the Indian Branch to overseas Head Office and the question of disallowance of the said interest by invoking the provisions of Section 40(a)(ia) does not arise thus, the order of the CIT(A) upheld Decided against Revenue. Condonation of delay - Whether the delay in filing of appeal by the assessee was on account of sufficient reasons or not Held that - In matters concerning the filing of appeals, in exercise of the statutory right, a refusal to condone delay can result in a meritorious matter being thrown out at the very threshold which would lead to miscarriage of justice - The judiciary is respected not on account of its power to legalize injustice on technical grounds but because it is capable of removing injustice and is expected to do so Relying upon Collector, Land Acquisition vs. Mst. Katiji Ors. 1987 (2) TMI 61 - SUPREME Court and Vedabai Alia Vaijayanatabai Baburao Patil vs. Shantaram Baburao Patil 2001 (7) TMI 117 - SUPREME Court - the court has to exercise the discretion on the facts of each case keeping in mind that in construing the expression 'sufficient cause', the principle of advancing substantial justice is of prime importance - the expression sufficient cause should receive liberal construction thus, the delay is condoned in the interest of substantial justice. Interest income earned by head office added in branch office Held that - The decision in Deputy Director of Income-tax (International Taxation) -4(1) Versus Mizuho Corporate Bank Ltd. 2012 (9) TMI 193 - ITAT MUMBAI followed - interest paid by Indian branch of the assessee bank to its overseas head office is not chargeable to tax in India - the provisions of sec.195 consequently would not be attracted in case of such payment of interest by the Indian Branch to overseas Head office thus, the order of the CIT(A) upheld Decided against Revenue.

Summary

Issues Involved:
1. Deduction of Head Office Expenditure under Section 44C.
2. Disallowance under Section 40(a)(ia) for interest payment to Head Office.
3. Addition of interest income earned by Head Office from Branch Office.
4. Condonation of delay in filing the appeal by the assessee.

Detailed Analysis:

1. Deduction of Head Office Expenditure under Section 44C:
The Revenue challenged the CIT(A)'s decision to allow the assessee a deduction of Rs.47,55,429/- claimed as Head Office Expenditure under Section 44C. The AO had disallowed this on the grounds that the expenditure was not actually incurred by the branch office in India and was not debited in the branch's books of accounts. However, the CIT(A) allowed the deduction, observing that expatriate employees were working in India for the branch's business operations, and thus, the expenditure met by the head office was allowable under Section 44C. The Tribunal upheld CIT(A)'s decision, stating that the expenses incurred by the Head Office for expatriate staff working in India were legitimate expenses of the branch, irrespective of whether they were recorded in the branch's books.

2. Disallowance under Section 40(a)(ia) for Interest Payment to Head Office:
The AO disallowed Rs.35,13,949/- under Section 40(a)(ia) for interest payment to the head office without withholding tax. CIT(A) overturned this disallowance, citing that Section 195 requires two distinct legal entities for tax withholding, which is not the case between a branch and its head office. The Tribunal supported CIT(A)'s view, referencing the ITAT Special Bench decision in the case of ABN Amro Bank, which established that payments from a branch to its head office do not attract tax withholding requirements.

3. Addition of Interest Income Earned by Head Office from Branch Office:
The AO added Rs.90,77,349/- as interest income earned by the head office from the branch office, asserting that it was not disclosed and tax was not withheld as per Section 195. CIT(A) upheld this addition, referencing a coordinate Bench decision. However, the Tribunal found that the issue was covered by the ITAT Special Bench decision in Sumitomo Mitsu Banking Corp., which held that interest paid by an Indian branch to its overseas head office is not taxable in India. Therefore, the Tribunal ruled in favor of the assessee, following its own precedent in the assessee's previous year's case.

4. Condonation of Delay in Filing the Appeal by the Assessee:
The assessee's appeal was delayed, and the Tribunal considered whether the delay was due to sufficient cause. The assessee argued that they were under the mistaken belief that the CIT(A) had ruled in their favor based on a similar issue in the previous year. The Tribunal, citing various Supreme Court decisions, including Collector, Land Acquisition vs. Mst. Katiji and Vedabai Alia Vaijayanatabai Baburao Patil vs. Shantaram Baburao Patil, adopted a liberal approach towards condonation of delay, emphasizing substantial justice over technicalities. Consequently, the delay was condoned.

Conclusion:
The Tribunal upheld the CIT(A)'s decisions regarding the deduction of head office expenditure and the disallowance under Section 40(a)(ia). It also ruled in favor of the assessee on the addition of interest income earned by the head office, following the precedent set by the ITAT Special Bench. The delay in filing the appeal by the assessee was condoned, emphasizing the importance of substantial justice. The appeal of the assessee was allowed, the Revenue's appeal was dismissed, and the cross objection by the assessee was dismissed as infructuous.