2012 (11) TMI 555 - AT - Income Tax

Deletion of addition on account of Interest Held that - Addition due to Interest paid on purchase of securities by the assessee-company for the broken period as per DTAA be deleted as decided in assesses own case earlier - impugned order is upheld to this extent. This ground is, therefore, not allowed. Advisory fee/Commission - Accrual of Income - Following the decision of court in case of Kerala Urban Development Finance Corporation Ltd. Versus Commissioner Of Income-Tax ,2002 (12) TMI 18 - KERALA HIGH COURT Held that - Income accrued to the assessee at the time of disbursal of loan and hence assessable to tax in the year in which the loan amount was disbursed. Income accrued at that very stage itself and could not have been deferred over the life of loan - CIT(A) was not justified in directing the spread over of the advisory fee over the period of loan - impugned order on this issue is vacated and restore the action taken by the A.O - In the result, the appeal of the assessee is allowed and that of the Revenue is partly allowed. Disallowance of Interest - Assessee in its appeal are similar to those for assessment year 2000-2001 but for change in the amount of Rs. 2,03,34,257 being the interest disallowed u/s 40(a)(i) and also charged to tax under Article 11 of the DTAA. Both the sides are in agreement that the facts and circumstances of the instant year are mutatis mutandis similar to those of the preceding year in favour of assessee. Advisory Fee - Held that - In reversing the order of the CIT(A) and restoring the action of the AO in bringing the entire amount to tax in the preceding year, the amount already voluntarily offered by the assessee for taxation in the current year, on the strength of its treatment as deferred income in earlier year, cannot be taxed once again, if the entire amount has been taxed in a year, then no part of the same can be charged to tax in the subsequent year - As the necessary facts in this regard are not available on record impugned order on this issue is set aside and remit the matter to the file of A.O. for examining as to whether the amount of Rs. 24.36 lakh taxed in the current year is part of the amount of advisory fee taxed in assessment year 2000-2001 - partly allowed for statistical purposes.

Summary

Issues:
1. Disallowance of interest paid to Singapore branch under section 40(a)(i) of the Act and simultaneous taxation of interest received by Singapore branch under Article 11 of the DTAA between India and Canada.
2. Deletion of addition on account of interest paid on purchase of securities.
3. Direction to spread advisory fee/commission over a period of time instead of taxing it in the year under consideration.

Analysis:

Issue 1:
The primary issue in the assessment year 2000-2001 pertains to the disallowance of interest paid to the Singapore branch under section 40(a)(i) of the Act and the taxation of interest received by the Singapore branch under Article 11 of the DTAA between India and Canada. The Special Bench order in the case of Sumitomo Mitsui Banking Corpn. v. Dy. DIT (IT) was cited, holding that interest paid by the Permanent Establishment (PE) to head office or other branches outside India is deductible in the hands of the PE and not taxable in the hands of the head office. The Tribunal, following this precedent, reversed the impugned order, stating that the interest amount cannot be added under section 40(a)(i) nor taxed under the DTAA with Canada.

Issue 2:
Regarding the deletion of the addition on account of interest paid on the purchase of securities, the Tribunal upheld the impugned order based on a previous favorable decision by the Tribunal, affirmed by the High Court. The Departmental Representative agreed with this submission, leading to the ground not being allowed.

Issue 3:
The final issue involves the direction to spread advisory fee/commission over a period instead of taxing it in the current year. The Assessing Officer called for an explanation regarding the fee for advisory services and why it was not entirely offered for taxation in the year under consideration. The Tribunal observed that the advisory fee related to services rendered for the sanction of loans and should not be spread over the loan's life. Relying on various judgments, including one by the Hon'ble Kerala High Court, the Tribunal held that the entire income accrued in the year of rendering services and could not be deferred over the loan's life. Consequently, the Tribunal vacated the impugned order and restored the action taken by the Assessing Officer, allowing this ground.

In the assessment year 2001-2002, similar issues were raised, and the Tribunal decided in favor of the assessee following the view taken in the preceding year. The Tribunal also addressed the issue of advisory fee previously treated as deferred income and concluded that if the entire amount was taxed in a year, no part of it could be taxed again in a subsequent year. The matter was remitted to the Assessing Officer for further examination, and the ground was partly allowed for statistical purposes.

In conclusion, the appeal of the assessee was allowed, and that of the Revenue was partly allowed for statistical purposes in both assessment years.