2020 (9) TMI 666 - AT - Income Tax

Disallowance u/s 14A - net interest expenditure - AR submitted that disallowance u/s 14A is attracted only when assessee incurs any expenditure for earning the income which is not forming part of total income - HELD THAT - In this AY, there is net interest income but it may not be the same situation in all the AYs. The transaction with the Head Office and Branch, which is dealing with themselves has to considered like Mutual Concerns and all the transaction with them should be eliminated for taxation purpose, not just the income but also the expenditure. When the whole transaction is eliminated with the Head Office, it is important to note that it is the main business of the assessee i.e., Banking, all the relevant expenditure for carrying out these transaction also to be eliminated. We do not agree with the assessee that only exempt income which is not part of total income alone should be considered to disallowance u/s 14A. As per the provision of section14A at that point of time, it clearly says that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. Nowhere it says it is confine to exempt income which is not form part of total income. Therefore, we are also incline to remit this issue back to AO to quantify the disallowance u/s 14A by eliminating the expenditure relevant for earning the above said income, it may not the interest expenditure alone, it will include the administrative and other expenditure. We urge the AO that the disallowance cannot be more than the income earned by the assessee as it is judicial precedent that the disallowance cannot be more than the income earned by the assessee. Accordingly the ground raised by the assessee is remitted back to AO to quantify the disallowance u/s 14A based on the above direction.

Issues Involved:
1. Taxability of interest income received from the head office.
2. Applicability of Section 14A for expenditure incurred on income not part of taxable income.
3. Disallowance under Section 40(a)(i) for transaction charges on Nostro Accounts.
4. Deductibility of expenses under Section 37 incurred by the head office on behalf of Indian branches.

Detailed Analysis:

1. Taxability of Interest Income Received from the Head Office:
The assessee, engaged in banking, credited ?14,35,542 as interest from its head office but excluded it from taxable income, claiming it as non-taxable being a self-transaction. The Assessing Officer (AO) included this as taxable income under Sections 5 and 9 of the Act. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted this addition, applying the principle of mutuality, as supported by the Special Bench decision in Sumitomo Mitsui Banking Corporation, which held that transactions between the Indian branch and its foreign head office do not generate taxable income. This decision was upheld by the ITAT, directing the AO to follow the same principle.

2. Applicability of Section 14A for Expenditure Incurred on Income Not Part of Taxable Income:
The AO applied Section 14A to disallow expenses related to non-taxable interest income from the head office. The CIT(A) confirmed this, relying on previous ITAT decisions. The ITAT upheld the CIT(A)'s decision, remitting the matter back to the AO to quantify the disallowance, emphasizing that the disallowance should not exceed the income earned and should include all relevant expenditures, not just interest.

3. Disallowance under Section 40(a)(i) for Transaction Charges on Nostro Accounts:
The AO disallowed ?4,07,474 under Section 40(a)(i) for non-deduction of tax at source on transaction charges paid on Nostro Accounts. The CIT(A) deleted this disallowance, citing ITAT decisions in the assessee's earlier cases, which held these charges as bank charges accruing outside India, thus not requiring TDS. The ITAT upheld this deletion, directing the AO to follow the same principle.

4. Deductibility of Expenses under Section 37 Incurred by the Head Office on Behalf of Indian Branches:
The AO disallowed ?45,164 claimed under Section 37 for expenses incurred by the head office on behalf of Indian branches, considering them under Section 44C. The CIT(A) deleted this disallowance, referencing ITAT decisions and the Bombay High Court ruling in Emirates Commercial Bank Ltd., which allowed such expenses under Section 37. The ITAT upheld this deletion, directing the AO to follow the same principle.

Appeals and Cross Objections:
The revenue's grounds of appeal were dismissed as they were already adjudicated in favor of the assessee by the ITAT and confirmed by the jurisdictional High Court. The assessee's appeal on the applicability of Section 14A was remitted back to the AO for quantification, while other grounds were dismissed as not pressed due to the smallness of the amount involved. The cross-objection by the assessee was also dismissed following the dismissal of the revenue's appeal.

Conclusion:
The ITAT upheld the CIT(A)'s decisions on all issues, remitting the matter of Section 14A disallowance back to the AO for quantification. The appeal by the revenue was dismissed, and the assessee's appeal was partly allowed for statistical purposes. The cross-objection by the assessee was dismissed.

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