2012 (11) TMI 840 - AT - Income Tax

Adhoc disallowance - held that - Ld. CIT(A) has confirmed an adhoc disallowance of Rs. 1,00,000/- after observing that assessee has not supported the claim with documentary evidence. We agree with Ld. CIT(A) that mere claim of deduction is not sufficient and it should be supported by some material. - Decided against the assessee. Head office expenses - Restrictions u/s 40C - Held that - Expenses incurred on soliciting NRI deposits are in the nature of head office administration and supervision expenses, since they have been incurred entirely for the Indian operations and are not allocable to any other country in which the appellants have operations, the provisions of Sec. 44C are not applicable as the essential requirement of section 44C is that expenses are required to be allocated since they are for the supervision of all locations other than the head office - in favour of assessee Net loss on unmatured forward exchange contracts - anticipated loss - held that - anticipated losses on account of existing obligation as on 31st March, determinable with reasonable currency, being in the nature of expenditure/accrued liability, have to be taken into account while preparing financial statement. - matter restored to AO to consider liability which has accrued as per Accounting Policy consistently followed by assessee as on 31.3.1998 and accordingly to allow said claim to that extent. TDS - payment to Master Card International - scope of Sec.9(1)(vi) and Article-12 of DTAA - held that - after Mutual agreement entered into between India and USA, these two entities namely Visa International and Master Card International are deemed to be having Permanent Establishment in India; but in the relevant assessment year and at the time when assessee made payments to these two entities, said dispute was there - even if assessee bank failed to deduct TDS on the payments made to Visa International and Master Card International, same could not be disallowed as per provisions of Sec. 40A(i) of the I.T. Act - Decided in favor of assessee.

Issues Involved:

1. Disallowance of entertainment expenses.
2. Disallowance of expenses incurred on soliciting NRI deposits and training courses.
3. Setting off the closing provision determined under section 36(1)(viia) against bad debts written off.
4. Disallowance of bad debts claimed in earlier assessment years.
5. Disallowance of net loss on unmatured forward exchange contracts.
6. Disallowance of payments to Master Card International and Visa Card International due to non-deduction of TDS.
7. Deletion of guest house expenses.
8. Disallowance of broken period interest in respect of securities purchased.
9. Allowance of cost of funds for earning tax-free income.

Detailed Analysis:

1. Disallowance of Entertainment Expenses:
The assessee, a branch of a foreign bank, claimed entertainment expenses of Rs. 3,69,33,529/-. The AO disallowed these expenses, considering them non-business expenditures under section 37(1) of the Act. The Ld. CIT(A) restricted the disallowance to Rs. 1,00,000/- due to the lack of documentary evidence from the assessee. The Tribunal upheld the Ld. CIT(A)'s disallowance as reasonable, rejecting the grounds raised by both the assessee and the Revenue.

2. Disallowance of Expenses on Soliciting NRI Deposits and Training:
The AO disallowed Rs. 22,53,31,656/- incurred on soliciting NRI deposits and training, treating them as head office expenses under section 44C. The Ld. CIT(A) confirmed this action. However, the Tribunal, referencing its prior decision in the assessee's case for assessment year 1997-98, allowed the appeal, holding that section 44C does not apply to expenses incurred exclusively for the branch.

3. Setting Off Closing Provision Against Bad Debts:
The issue was covered in the assessee's favor for assessment years 2002-03 and 2004-05. The Tribunal held that the credit balance for considering provisions for bad and doubtful debts under section 36(1)(viia) would be the opening credit balance brought forward as on 1st April of the relevant account year, reversing the orders of the authorities below.

4. Disallowance of Bad Debts Claimed in Earlier Years:
The assessee did not press this ground, and hence it was rejected.

5. Disallowance of Net Loss on Unmatured Forward Exchange Contracts:
The AO disallowed the net loss of Rs. 13,18,565/- on unmatured forward exchange contracts, treating it as an estimated loss. The Tribunal, referencing the Special Bench decision in the case of Bank of Bahrain & Kuwait, restored the matter to the AO to consider the liability as per the accounting policy consistently followed by the assessee.

6. Disallowance of Payments to Master Card and Visa Card International:
The AO disallowed Rs. 82,33,404/- paid to Visa International and Master Card International without deducting TDS, treating them as royalty under section 9(1)(vi) and Article 12 of the DTAA. The Ld. CIT(A) confirmed this. However, the Tribunal, following its decision in the case of Central Bank of India and considering Article 26(3) of Indo-US DTAA, deleted the disallowance, noting that the payees had already paid tax on the amount received from the assessee.

7. Deletion of Guest House Expenses:
The AO disallowed guest house expenses due to the lack of details. The Ld. CIT(A) deleted the disallowance, noting that section 37(4) was deleted w.e.f. 1.4.1998 and there was no material to hold that the expenses were non-business. The Tribunal upheld the Ld. CIT(A)'s order, noting the department did not dispute the business purpose of the expenses.

8. Disallowance of Broken Period Interest:
The AO disallowed Rs. 26,62,92,280/- being broken period interest on securities purchased but unsold at year-end. The Tribunal upheld the Ld. CIT(A)'s order, referencing the Apex Court's decision in the assessee's favor.

9. Allowance of Cost of Funds for Earning Tax-Free Income:
The AO apportioned interest in respect of tax-free bonds, allowing only net interest income under section 10(15). The Ld. CIT(A) held that no expenditure was incurred for earning tax-free income. The Tribunal restored the issue to the AO for fresh consideration, following its earlier order for assessment year 1997-98.

Cross Objections:
In light of the Tribunal's decisions favoring the assessee, the cross objections became infructuous and were dismissed.

Conclusion:
The appeals by both the assessee and the department for assessment years 1998-99 and 1999-2000 were partly allowed, with specific issues being restored to the AO for fresh consideration. The cross objections by the assessee for both assessment years were dismissed.

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