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2022 (9) TMI 1577 - AT - Income TaxDisallowance of interest expenditure attributable to earning of exempt income - HELD THAT - Respectfully following the decision in assessee s own case for the A.Y. 1997-98.we allow ground raised by the assessee wherein as held Commissioner (Appeals) has recorded a categorical factual finding that the interest bearing funds have no nexus with the investment made in tax free bonds. Further, he has also recorded a finding of fact that the assessee had sufficient own fund to make investment in tax free bonds. The aforesaid factual finding of the first appellate authority has not been controverted by the Revenue through any substantive evidence brought on record.- Decided against revenue. Nature of expenses - Expenditure on refurbishment of premises and software - AR submitted that the bank incurred expenditure towards electrical fittings, false ceiling, interiors, temporary fittings, paintings wooden partition, flooring etc. and it is essential for the Bank to incur such expenses for proper ambience as it is in a customer centric industry - HELD THAT - We observed that Hon'ble Supreme Court in the case of Madras Auto Services Pvt. Ltd. 1998 (8) TMI 1 - SUPREME COURT on similar issue adjudicated in favour of the assessee as held looked upon expenditure which did bring about some kind of an enduring benefit to the company as a revenue expenditure when the expenditure did not bring into existence any capital asset for the company. The asset which was created belonged to somebody else and the company derived an enduring business advantage by expending the amount. In all these cases, the expense has been looked upon as having been made for the purpose of conducting the business of the assessee more profitably or more successfully. In the present case also, since the asset created by spending the said amounts did not belong to the assessee but t he assessee got the business advantage of using modern premises at a low rent, thus saving considerable revenue expenditure for the next 39 years, both the Tribunal as well as the High Court have rightly come to the conclusion that the expenditure should be looked upon as revenue expenditure.- Decided against revenue. Taxability u/s. 115JA - Assessee is not constituted as a company under the Companies Act - HELD THAT - As we observed that similar issue was considered and adjudicated by the Coordinate Bench in assessee s own case for the A.Y. 1997-98 and decided the issue in favour of the assessee wherein as held since the assessee is not constituted as a company under the Companies Act, 1956, the provisions of section 115JA of the Act cannot be applied. While doing so, the Bench further observed that since the assessee Corporation is not required to distribute any dividend, it cannot be considered to be a company under the Companies Act, 1956. The facts involved in assessee s case are more or less identical to the facts of MSEB 2001 (8) TMI 310 - ITAT MUMBAI . In view of the aforesaid, we hold that the provisions of section 115JA of the Act are not applicable to the assessee. - Decided against revenue. Denial for deduction of head office expenditure in entirety - restricting the claim u/s. 44C - AR submitted that Deduction of Head Office expenses should be allowed in entirety as per Non Discrimination Article 26 of Tax Treaty between India and UK and not restricting the claim u/s. 44C - AR submitted that discriminatory provisions have to be ignored for foreign/non-resident assessee in view of Tax Treaty - HELD THAT - We observe that Coordinate Bench in the case of Metchem Canada Inc., 2005 (9) TMI 227 - ITAT BOMBAY-F considered the similar issue and adjudicated in favour of the assessee as held beyond dispute, only such expenses are to be allowed as a deduction on account of head office expenses as can be fairly allocated to the PE. The only impact of the applicability of non-discrimination clause will be that the scope of deduction under Section 37(1) will not stand curtailed by the restriction placed under Section 44C of the Act. Section 44C has no application in the matter and that the assessee is to be allowed deduction of such head office expenses as can be fairly allocated to the PE. - Decided against revenue. Non taxability of interest on income tax refund - HELD THAT - As decided in the case of Avada Trading 2006 (1) TMI 465 - ITAT MUMBAI any income assessed may become non-taxable by virtue of retrospective amendment and consequently, erroneous assessment can be rectified. Therefore, in our humble opinion, if the interest granted under Section 244A(1) is varied under Sub-section (3) of such section, then the interest originally granted would be substituted by the reduced/increased amount as the case may be -Interest on refund under Section 244A(1) would be assessable in the year in which it is granted and not in the year in which proceedings under Section 143(1)(a) attain finality. Interest on tax refund be taxed at 10% as per India-UK Treaty - HELD THAT - As decided in Credit Agricole Indosuez 2015 (6) TMI 974 - BOMBAY HIGH COURT no fault can be found with the impugned order of the Tribunal in restoring the issue to the Assessing officer to determine / adopt the rate of tax on refund in the light of the relevant clauses of Indo-France DTAA and the decision of Special Bench in Clough Engineering 2011 (5) TMI 562 - ITAT, DELHI .
Issues Involved:
1. Tax Free Interest - Proportionate Expenses Disallowed 2. Expenditure on Refurbishment of Premises and Software 3. Taxability under Section 115JA 4. Deduction of Head Office Expenditure under Section 44C 5. Additional Grounds - Taxability of Interest on Income-Tax Refund Issue-wise Analysis: 1. Tax Free Interest - Proportionate Expenses Disallowed: The assessee contested the disallowance of Rs. 3,64,31,158/- made by the CIT(A) under Section 14A, asserting that no expenditure was incurred to earn tax-free income. The Tribunal noted that the assessee had sufficient own funds, and no borrowed funds were used for investments. It referenced a similar issue adjudicated in the assessee's favor for the A.Y. 1997-98, where it was established that there was no nexus between interest-bearing funds and investments in tax-free bonds. The Tribunal allowed the ground in favor of the assessee, following the precedent. 2. Expenditure on Refurbishment of Premises and Software: The assessee argued that expenses incurred on refurbishment and software development were essential for business operations and should be treated as revenue expenditure. The Tribunal referred to the Supreme Court decision in Madras Auto Services Pvt. Ltd., which held that such expenses, even if resulting in enduring benefits, are revenue in nature if they do not create a capital asset for the assessee. The Tribunal allowed the ground, treating the refurbishment and software expenses as revenue expenditure. 3. Taxability under Section 115JA: The assessee contended that provisions of Section 115JA, which stipulate a presumptive rate of profits, should not apply, citing the DTAA between India and the UK. The Tribunal referenced its decision for A.Y. 1997-98, where it was held that Section 115JA does not apply to banking companies as they are governed by the Banking Regulations Act and not required to prepare accounts under Schedule VI of the Companies Act. The Tribunal allowed the ground in favor of the assessee. 4. Deduction of Head Office Expenditure under Section 44C: The assessee argued that the entire head office expenditure of Rs. 23,28,71,503/- should be allowed without restriction under Section 44C, citing the non-discrimination clause in the India-UK Tax Treaty. The Tribunal referred to its decision in Metchem Canada Inc. v. DCIT, which held that discriminatory provisions should be ignored for foreign assessees under the tax treaty. The Tribunal allowed the ground, permitting the deduction of the entire head office expenditure. 5. Additional Grounds - Taxability of Interest on Income-Tax Refund: The assessee raised additional grounds regarding the non-taxability of interest on income-tax refunds and, alternatively, the application of a 10% tax rate under the India-UK Treaty. The Tribunal admitted these grounds as they were purely legal and did not require fresh fact examination. It referenced the decision in Avada Trading v. ACIT, which held that interest on income-tax refunds should be taxed in the year of receipt. Additionally, the Tribunal followed the Bombay High Court's decision in DIT v. Credit Agricole Indosuez, which applied a 10% tax rate on such interest under the DTAA. The Tribunal allowed both additional grounds. Revenue's Appeal: The Revenue's appeal contested the allowance of direct expenses incurred outside India and the relief granted for refurbishment expenses. The Tribunal dismissed the grounds related to direct expenses, following its earlier decision in the assessee's favor for A.Y. 1997-98, which allowed such expenses under Section 37(1) without the restrictions of Section 44C. For refurbishment expenses, the Tribunal's decision in the assessee's appeal applied mutatis mutandis, leading to the dismissal of the Revenue's grounds. Conclusion: The Tribunal allowed the assessee's appeal on all grounds and dismissed the Revenue's appeal, following precedents and legal principles established in previous judgments.
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