2024 (7) TMI 1339 - HC - Income Tax

Taxability of income in India - deduction with respect to salaries paid by the appellant in foreign currency and outside India, to the expatriates of the appellant working in India - Indo-Japan tax treaty - HELD THAT - As following the decisions of Emirates Commercial Bank Ltd. 2003 (4) TMI 2 - BOMBAY HIGH COURT this ground is allowed. We also bear in mind the view expressed by the Supreme Court in Goetze (India) Ltd. 2006 (3) TMI 75 - SUPREME COURT and where an exception was carved out in respect of the statutory prohibition of a deduction being claimed outside the Return of Income and of the same not being applicable in case of a direction issued by a Tribunal or Court. The writ petition is accordingly allowed. We quash the order dated 13 May 2022 insofar as it denied relief to the petitioner in respect of the deductions which were liable to be made pursuant to the order of the Tribunal dated 03 June 2019.

Issues Involved:

1. Denial of deduction of INR 9,62,39,916/- by the Assessing Officer.
2. Applicability of the Indo-Japan tax treaty and Section 40(a)(i) of the Income Tax Act.
3. Tribunal's decision on the deductibility of salaries paid to expatriate employees.
4. Assessing Officer's interpretation and application of Tribunal's order.
5. Legal principles regarding claims for deductions outside the Return of Income.
6. Judicial precedents on the powers of appellate authorities and the Tribunal.

Issue-wise Detailed Analysis:

1. Denial of Deduction of INR 9,62,39,916/- by the Assessing Officer:
The writ petitioner challenged the order framed by the Assessing Officer (AO) dated 13 May 2022, which denied a deduction of INR 9,62,39,916/-. This order was framed to give effect to the decision rendered by the Income Tax Appellate Tribunal (Tribunal) for Assessment Year 1998-1999.

2. Applicability of the Indo-Japan Tax Treaty and Section 40(a)(i) of the Income Tax Act:
The Tribunal dealt with Ground No. 6, which pertained to deductions claimed concerning payments of salary to expatriate employees. The petitioner argued that the CIT (Appeals) erred in confirming the AO's action in rejecting the claim for deduction of salaries paid in foreign currency and outside India to expatriates working in India. The petitioner contended that these deductions were allowable under Article 7(3) of the Indo-Japan tax treaty, notwithstanding the restrictions under Section 40(a)(i) of the Income Tax Act.

3. Tribunal's Decision on the Deductibility of Salaries Paid to Expatriate Employees:
The Tribunal had previously allowed similar claims in the case of Bank of Tokyo Mitsubishi UFJ Ltd. vs. ADIT, Circle-1(1), International Taxation, New Delhi, and this decision was upheld by the Hon'ble Delhi High Court. The Tribunal's decision was based on the premise that the salaries and taxes paid were wholly and exclusively for the Indian branch and could not be allocated to any other branch by the head office. Consequently, the Tribunal allowed the deduction of INR 9,62,39,916/-.

4. Assessing Officer's Interpretation and Application of Tribunal's Order:
The AO, while passing the appeal effect order, observed that the assessed income should not be less than the returned income of INR 27,91,99,320/-. The AO computed the income of the assessee company as INR 27,91,99,320/- and considered the advance tax of INR 13,75,00,000/- in the computation of tax. However, the AO's reasons for denying the deduction were found to be wholly misconceived and untenable, as the Tribunal had already accorded relief and allowed Ground No. 6.

5. Legal Principles Regarding Claims for Deductions Outside the Return of Income:
The court referred to the Supreme Court's decision in Goetze (India) Ltd. vs. Commissioner of Income Tax, which carved out an exception for claims made pursuant to a direction issued by a Tribunal or Court. The Supreme Court held that while the AO could not entertain a claim for deduction outside the Return of Income without a revised return, this restriction did not apply to the Tribunal's powers under Section 254 of the Income Tax Act.

6. Judicial Precedents on the Powers of Appellate Authorities and the Tribunal:
The court cited several judicial precedents, including Commissioner of Income Tax vs. Jai Parabolic Springs Ltd, Rites Limited v. Commissioner of Income Tax, and Wipro Finance Ltd. v. Commissioner of Income Tax, which emphasized that appellate authorities and the Tribunal have wide powers to entertain new claims and grounds, even if not raised earlier. The Tribunal's powers are plenary and not restricted to the grounds raised before the lower authorities.

Conclusion:
The court found the AO's opinion to be wholly misconceived and untenable, as the Tribunal had already allowed the deduction. The writ petition was allowed, and the order dated 13 May 2022 was quashed insofar as it denied relief to the petitioner. The AO was directed to frame and grant consequential relief within six weeks. The writ petition was disposed of on these terms.

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