2016 (11) TMI 1600 - HC - Income Tax

Expenses incurred on Information Technology by the Head office on and charged to the Indian Branch - assessee was deductible u/s 37(1) without any restrictions contained in Section 44C? - Held that - The grievance being that the expenditure incurred on Information Technology to the extent of ₹ 14.99 crores cannot be disallowed u/s 40A(i) for failure to deduct tax at source. It is clear that the the Revenue was not aggrieved by the order of the CIT(A) allowing deduction under Section 37(1) and also with the direction of the CIT(A) that the aforesaid payment would not be allowed as a deduction under Section 44C, therefore in the above view it is not open for the Revenue to urge this issue before us when the same was not urged before the Tribunal leading to the impugned order of the Tribunal. Question no.1 as formulated does not give rise to any substantial question of law National loss arising from revaluation of unmatured forward exchange contract - Allowable deduction - no accrual as the forward contract was not settled and without appreciating the true nature of the transaction - Held that - Issue stands covered in favour of the assessee and against the Revenue by the decision of this Court in Commissioner of Income Tax v/s. Bank of India reported in 1995 (11) TMI 78 - BOMBAY HIGH COURT . Appeal admitted on the substantial questions of law at question nos. (2), (3) and (5).

Summary

Issues involved:
1. Deductibility of expenses incurred on Information Technology under Section 37(1) of the Income Tax Act without restrictions contained in Section 44C.
2. Allowance of interest attributed to earning tax-exempt income under Section 14A of the Income Tax Act.
3. Allowance of payment towards all India Risk Insurance under Section 37(1) of the Income Tax Act instead of Section 44C.
4. Allowability of national loss arising from revaluation of unmatured forward exchange contract.
5. Tax treatment of net gain on unmatured forward foreign contract.

Analysis:

Issue 1: Deductibility of Information Technology expenses
The Revenue challenged the Tribunal's decision to allow the expenditure of ?14.99 crores on Information Technology under Section 37(1) without considering the restriction under Section 44C. However, the Commissioner of Income Tax (Appeals) had disallowed the expenditure based on non-compliance with Section 40A(i) regarding tax deduction at the source. The Revenue did not appeal this decision to the Tribunal, and the respondent-assessee appealed. As the Revenue did not contest the allowance under Section 37(1) or the disallowance under Section 44C before the Tribunal, the High Court held that this issue did not raise a substantial question of law and hence was not entertained.

Issue 2: Allowance of interest on tax-exempt income
The Tribunal confirmed the Commissioner of Income Tax (Appeals) decision to allow interest of ?10.37 crores attributed to earning tax-exempt income, despite the Assessing Officer's view that the expenditure should be disallowed under Section 14A of the Income Tax Act. The High Court admitted this issue for consideration as it raised substantial questions of law regarding the treatment of interest linked to tax-exempt income.

Issue 3: Payment towards all India Risk Insurance
The Tribunal allowed the payment of ?9.14 crores towards all India Risk Insurance under Section 37(1) of the Income Tax Act instead of Section 44C. This issue was admitted for consideration as it raised questions about the appropriate section for allowance of such payments.

Issue 4: National loss from revaluation of forward exchange contract
The Revenue argued that the Tribunal erred in allowing the deduction for the national loss arising from the revaluation of an unmatured forward exchange contract. However, the High Court noted that a previous decision had already concluded this issue in favor of the assessee, and hence, it did not raise a substantial question of law and was not entertained.

Issue 5: Tax treatment of net gain on forward foreign contract
The Tribunal did not tax the net gain on an unmatured forward foreign contract of ?4.65 crores, contrary to the Revenue's position. This issue was admitted for consideration as it raised questions about the tax treatment of such gains, especially in light of previous case law.

In conclusion, the High Court entertained issues 2, 3, and 5 for further consideration, while issues 1 and 4 were not entertained due to lack of substantial legal questions. The Tribunal's decisions on these issues will be reviewed based on the legal arguments presented.