2015 (8) TMI 1584 - HC - Income Tax

Deductibility of expenses incurred at Head Office on behalf of Indian Branch u/s 37(1) of the Act without restrictions contained in Section 44C - HELD THAT - This issue is concluded against the appellant/revenue by order of this Court in an appeal filed by revenue in respect of the same respondent relating to Assessment Year 1997-98 2015 (4) TMI 1041 - BOMBAY HIGH COURT Disallowance u/s 14A - Tribunal deleted addition - HELD THAT - Section 14A of the Act specifically provides that expenditure incurred in relation to income which does not form part of total income under the Act shall not be allowed as deduction. Thus it excludes the allowing of deduction of expenditure incurred to earn the exempt income. It does not disturb the finding of Supreme Court in Rajasthan State Warehousing Corpn. case 2000 (2) TMI 5 - SUPREME COURT in respect of cases wherein the expenditure is incurred on earning income which is not exempt. In this case, income earned is not exempt but chargeable to tax albeit at a lower rate. In the present facts it is not disputed that income earned on interest and dividends is chargeable to tax at a special rate under Section 115A of the Act. Consequently, there could be no occasion to invoke Section 14A of the Act to disallow expenditure which has admittedly been incurred in respect of income which is taxable. Interest income earned on funds by AO, in Indian Branch be termed as interest to self - HELD THAT - In the present facts, the issue arising for consideration is not the deduction on account of interest paid to the Head Office but the non exigibility to tax on account of interest received from its Head Office on the ground that no person can make profit out of itself as held by the Apex Court in the case of Sir Kikabhai Premchand 1953 (10) TMI 5 - SUPREME COURT In any view of the matter, Section 90(2) of the Act itself provides that the assessee has an option to either invoke DTAA or normal provisions of tax to the extent which of the two is more beneficial to it. In this case, by filing the revised return of income the claim to be subjected to tax under the DTAA stood withdrawn. In the above view, we see no substantial question of law arising for our consideration. Accordingly, Question as formulated by the revenue, does not give rise to any substantial question of law. Interest on bad and doubtful debts is not chargeable to tax for this year u/s. 43D when assessee had not credited such interest to it's P L Account of this year - grievance of the revenue is that as the crediting of interest to the RDFI account would by itself be sufficient to bring the amounts to tax under Section 43D - HELD THAT - We find that Section 43D of the Act clearly provides that only such interest on bad and doubtful debts which are received or is credited to the Profit and Loss Account for the year under consideration, would the same be taxable. In the present facts, the amount of interest attributable to bad and doubtful debts has not been received. Further the interest has not been credited to Profit and Loss Account but to a reserve amount called RDFI account maintained in terms of Reserve Bank of India's guidelines. Besides, this Court in CIT v. Citi Bank N.A. 1994 (4) TMI 72 - BOMBAY HIGH COURT had recorded the practice of banks to effectively control it's problem loans and it's recoveries by keeping/maintaining a memorandum record of interest due on such accounts. This is an usual banking practice to keep a tab/check on the problem loans and interest thereon. The provision under Section 43D of the Act are very clear and unequivocal that the interest receivable on bad and doubtful debts are chargeable to tax only when it is credited to the Profit and Loss Account and/or when they are actually received. Clearly, in the present case, the interest accrued on the bad and doubtful loans has not been credited to Profit and Loss Account nor has the amounts of such interest been received by the respondent. Therefore in view of the self evident position as noticed in Section 43D of the Act, no substantial question of law arises.

Summary

Issues:
1. Deductibility of expenses incurred at Head Office on behalf of Indian Branch under Section 37(1) of the Act without restrictions contained in Section 44C.
2. Deletion of disallowance made by AO Rs. 75,03,911/- keeping in view provisions of Section 14A.
3. Classification of interest income earned on funds by AO in Indian Branch as interest to self.
4. Taxability of interest on bad and doubtful debts under Section 43D when not credited to P&L Account.

Analysis:

Issue 1:
The Tribunal's decision regarding the deductibility of expenses incurred at the Head Office on behalf of the Indian Branch under Section 37(1) without restrictions in Section 44C was challenged by the revenue. However, the counsel for the revenue acknowledged that a similar issue had been decided against the revenue in a previous appeal for the Assessment Year 1997-98. The Court found no substantial question of law arising from this issue and dismissed it.

Issue 2:
The revenue contested the deletion of disallowance by the AO under Section 14A concerning dividend and interest income. The Tribunal relied on a Supreme Court decision and Section 14A of the Act to support its decision. The Court upheld the Tribunal's decision, stating that since the income was taxable, Section 14A did not apply, and the expenditure incurred could not be disallowed. Therefore, the Court found no substantial question of law in this regard.

Issue 3:
Regarding the classification of interest income earned on funds by the AO in the Indian Branch as interest to self, the revenue's argument was based on a previous decision. However, the counsel for the revenue later withdrew this argument, citing the application of DTAA. The Court noted that the respondent had initially claimed DTAA benefits but later withdrew them. As the interest income was not exempt but taxable at a lower rate, the Court found no substantial question of law in this issue.

Issue 4:
The dispute over the taxability of interest on bad and doubtful debts under Section 43D, not credited to the P&L Account, was raised by the revenue. The Court examined the RBI guidelines and the banking practice regarding such interest. It concluded that Section 43D only applies when interest is credited to the P&L Account or actually received, which was not the case here. Therefore, the Court dismissed this issue, finding no substantial question of law.