2012 (8) TMI 329 - AT - Income Tax

Interest paid to the Head office of the assessee bank as well as its overseas branches by the Indian branch - dis-allowance - assessee being commercial bank having its Head Office in France - Held that - Issue stands squarely covered by the decision rendered in case of Sumitomo Banking Corp. Mumbai (2012 (4) TMI 80 - ITAT MUMBAI ) wherein it was held that interest paid to the head office of the assessee bank as well as its overseas branches by the Indian branch cannot be taxed in India being payment to self which does not give rise to income that is taxable in India as per the domestic law or even as per the relevant tax treaty - Decided in favor of assessee. Dis-allowance u/s 14A of expenditure incurred in earning exempt income - Held that - Since dividend income accrued from the investment out of its own funds, hence dis-allowance has been rightly deleted - Decided in favor of assessee. Guarantee commission offered to tax on accrual basis - addition - method of accounting - Held that - Income from deferred guarantee commission did not accrue or arise in the year in which guarantee agreements were entered. It was held in case of CIT vs. Bank of Tokyo that such income should be spread over the period to which the guarantee commission related and should be assessed proportionately. Therefore, system of accounting regularly followed by the assessee should not be disturbed and accept the income as declared by the assessee following the same method - Decided in favor of assessee.

Issues:
1. Addition of interest paid by Indian Branches to Head Office and overseas branches for A.Y. 2002-03.
2. Disallowance of expenditure incurred in earning exempt income for A.Y. 2002-03.
3. Addition of guarantee commission for A.Y. 2002-03.
4. Similar issues for A.Y. 2003-04.

Issue 1: Addition of Interest Paid by Indian Branches (A.Y. 2002-03):
The case involved the addition of Rs.1,48,30,613/- as interest paid by Indian Branches to the Head Office and overseas branches of a commercial bank. The Assessing Officer (A.O.) treated this interest as income of the Head Office/overseas branches chargeable to tax in India. The assessee contended that the payment was to self and did not give rise to any income as per the Income-tax Act. The contention was based on legal precedents, but the Ld. CIT (A) upheld the A.O.'s decision. However, the ITAT, Mumbai, following a Special Bench decision, ruled that such interest payments did not give rise to taxable income in India. Consequently, the addition was deleted, and the assessee's appeal was allowed.

Issue 2: Disallowance of Expenditure for Exempt Income (A.Y. 2002-03):
The dispute involved the disallowance of Rs.3,64,795/- incurred in earning exempt dividend income. The A.O. disallowed the amount under sec.14A, but the Ld. CIT (A) deleted the disallowance based on the finding that the investment leading to exempt income was made from the assessee's own funds. The ITAT upheld the Ld. CIT (A)'s decision, noting that the investment was indeed made from the assessee's own funds in a previous year. The revenue's appeal on this issue was dismissed.

Issue 3: Addition of Guarantee Commission (A.Y. 2002-03):
The case involved the addition of Rs.67,63,204/- as guarantee commission, which the A.O. sought to tax in a different assessment year than when the income accrued. The A.O. brought the entire commission to tax in one year, contrary to the method consistently followed by the assessee. The Ld. CIT (A) directed the A.O. to accept the assessee's method of declaring guarantee commission on an accrual basis. The ITAT upheld the Ld. CIT (A)'s decision, citing a High Court ruling that deferred guarantee commission should be assessed proportionately over the relevant period. Consequently, the revenue's appeal on this issue was dismissed.

Issue 4: Similar Issues for A.Y. 2003-04:
For A.Y. 2003-04, similar issues concerning interest paid by Indian Branches and the taxability of guarantee commission were raised. The ITAT, following its decisions for A.Y. 2002-03, deleted the addition of interest paid by Indian Branches and upheld the Ld. CIT (A)'s decision on the taxability of guarantee commission. Thus, the appeals of the assessee were allowed, while those of the revenue were dismissed.

This comprehensive analysis of the legal judgment from the Appellate Tribunal ITAT, Mumbai, highlights the key issues, arguments presented, legal precedents cited, decisions made, and the final outcome for each issue involved in the appeals for the assessment years 2002-03 and 2003-04.

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