2023 (6) TMI 1346 - AT - Income Tax

Disallowance u/s. 14A r.w.r 8D(2)(iii) - shares are held as stock-in-trade - HELD THAT - As in light of various decisions rendered after considering the judgment rendered in the case of Maxopp Investment Ltd 2018 (3) TMI 805 - SUPREME COURT deleting disallowance u/s. 14A where shares are held as stock-in-trade, we are of considered view that disallowance u/s. 14A of the Act is unsustainable in the instant case. Thus, the assessee succeeds on ground No.1 of the appeal. Income taxable in India - Disallowing exclusion of profits of overseas branches - assessee claimed benefit of Double Taxation Avoidance Agreement (DTAA) entered into with the nations, where the branches of the assessee are located - HELD THAT - As decided in Tecnimont Pvt. Ltd. 2020 (3) TMI 676 - ITAT MUMBAI notification deals with connotations of the expression may be taxed , appearing in the tax treaties entered into by India, and there is absolutely no basis whatsoever to support the proposition that the effect of the notification has to be restricted in its application to non-business income only. No such differentiation in treatment of business and non-business income is envisaged in the said notification, nor to do we see any justification for inferring the same. Learned counsel does not have any material whatsoever in support of the proposition canvassed by him, nor does this proposition make any sense on the first principles- inasmuch as once the notification is issued without any such specific restriction for application to business income, we cannot infer a restriction in its application. We, therefore, reject the plea of the assessee, and thus decline to interfere in the matter. We uphold the action of the Assessing Officer in including the profits of the assessee s overseas branches in its taxable income in India. Decided against assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income-tax Act, 1961.
2. Exclusion of profits of foreign branches under Double Taxation Avoidance Agreement (DTAA).

Summary:

Issue 1: Disallowance under Section 14A of the Income-tax Act, 1961

The assessee contested the disallowance of Rs. 33,68,49,017 under Section 14A read with Rule 8D of the Income-tax Rules, 1962, related to expenditure incurred in relation to exempt income. The CIT(A) had confirmed the disallowance up to Rs. 6,71,46,150. The assessee argued that securities held in the ordinary course of banking business constitute stock-in-trade, and therefore, disallowance under Section 14A is not applicable. The Tribunal referred to the Supreme Court's decision in Maxopp Investment Ltd. vs. CIT, which clarified that Section 14A applies even if shares are held as stock-in-trade. However, the Tribunal also noted that various High Court decisions, including the Delhi High Court in PCIT vs. Punjab & Sind Bank, have held that no disallowance under Section 14A is warranted for shares held as stock-in-trade. Consequently, the Tribunal ruled in favor of the assessee, stating that disallowance under Section 14A is unsustainable in this case. The alternative prayer in ground No.1A was dismissed as infructuous.

Issue 2: Exclusion of profits of foreign branches under Double Taxation Avoidance Agreement (DTAA)

The assessee sought the exclusion of profits amounting to Rs. 635,19,04,811 earned by branches in countries with which India has DTAA agreements. The CIT(A) had disallowed this exclusion. The Tribunal noted that this issue had been decided against the assessee in its own case for the Assessment Year 2015-16, where reliance was placed on the decision in Tecnimont Private Ltd. vs. ACIT and Notification No.91 of 2008. The Tribunal upheld the CIT(A)'s decision, rejecting the assessee's argument that the notification is inconsistent with the Act. The Tribunal also directed that tax credits for taxes paid abroad should be granted in accordance with the respective DTAA provisions, if admissible.

Appeal by Revenue:

The Revenue's appeal challenged the CIT(A)'s deletion of disallowance under Rule 8D(2)(ii) and the restriction of disallowance under Section 14A to the extent of exempt income earned. The Tribunal found no merit in the Revenue's grounds, noting that the assessee's own interest-free funds were sufficient to match the investments. The Tribunal dismissed the Revenue's appeal as misconceived and not maintainable.

Conclusion:

The assessee's appeal was partly allowed, and the Revenue's appeal was dismissed. The Tribunal's order was pronounced on June 28, 2023.