2013 (9) TMI 364 - AT - Income Tax

Disallowance u/s 14A - Earlier CIT(A) held that interest on nostro account is Not taxable - later decision of CIT(A) reversed - Held that - Once the income itself was chargeable to tax, there can be no question of computing any disallowance under section 14A, the mandate of which operates to disallow deduction for expenses incurred in relation to income which does not form part of the total income under the Act - The interest income on nostro account was liable to be included in the total income - Accordingly, grounds raised by the assessee against the enhancement done by the learned Commissioner of Incometax (Appeals) by invoking the provisions of section 14A were also consequently allowed. Allowability of Broken Period Interest as Expenditure Held that - The interest paid in respect of the broken period be set off against the interest received in respect of the broken period - following its decision for the assessment year 1991-92, had decided this issue against the Revenue. Exemption of Gross Interest u/s 10(15) - the issue was against the exemption in respect of gross interest earned from tax-free security under section 10(15) of the Act Held that - Exemption under section 10(15) was on gross basis and in the facts and circumstances of the case, there can be no disallowance under section 14A qua the investment in taxfree securities - Following Dresdner Bank AG v. Addl. CIT 2006 (10) TMI 175 - ITAT BOMBAY-F - it becomes apparent that exemption under section 10(15) was to be allowed on gross interest and not on the net interest - East India Pharmaceutical Works Ltd. v. CIT 1997 (3) TMI 5 - SUPREME Court - if there be interest-free funds available to the assessee sufficient to meet its investment and at the same time loan has been raised, it can be presumed that the investments were made from interest-free funds and resultantly no disallowance of interest can be made Decided against Revenue. Deduction u/s 44C Following The Joint Commissioner of Income-tax Versus M/s. American Express Bank Limited 2012 (8) TMI 371 - ITAT MUMBAI - Exclusive expenses incurred by the head office for Indian branch were outside the purview of sec. 44C and only common head office expenses were governed by this section - Once the amount was found to be incurred exclusively by H.O. towards the Indian branch, the same was required to be allowed in terms of section 37(1) without any reference to section 44C. Interest Received u/s 244A Held that - Interest under section 143(1)(a) was assessable to tax in the year in question. The proposition as raised by the learned authorised representative is about the rate of tax which should be applied on such interest Relying upon CIT v. Clough Engineering Ltd. 2011 (5) TMI 562 - ITAT, DELHI - the claim for refund of income-tax cannot be said to be effectively connected with the receipts of permanent establishment and hence interest on refund of tax was taxable under article 11(2) of the Double Taxation Avoidance Agreement between India and Australia and not under article 7 read with article 11(4) - if the Assessing Officer was directed to adopt the rate at which such interest on income-tax refund should be charged by examining the relevant clauses of the Double Taxation Avoidance Agreement between India and France, in conformity with the aforenoted Special Bench order.

Issues Involved:
1. Taxability of interest on nostro account.
2. Allowability of broken period interest as expenditure.
3. Exemption of gross interest from tax-free securities under section 10(15).
4. Deduction of bad debt written off under section 36(1)(vii).
5. Deduction independent of section 44C.
6. Taxability of income at a higher rate for non-resident companies.
7. Taxability of interest received on intimation under section 143(1)(a).
8. Taxation of interest and commission received from head office/branches.
9. Charging of interest under section 234B.

Detailed Analysis:

1. Taxability of Interest on Nostro Account:
The Revenue contended that interest on the nostro account amounting to Rs. 13.66 crores should be included in the total income. The assessee conceded to this, despite a previous Tribunal ruling in their favor. Consequently, the Tribunal held that this interest is chargeable to tax. The Commissioner of Income-tax (Appeals) had previously disallowed Rs. 32.79 crores under section 14A, but since the interest is now taxable, this disallowance was overturned.

2. Allowability of Broken Period Interest as Expenditure:
The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision to allow broken period interest as expenditure, following precedent from previous years where similar issues were decided against the Revenue.

3. Exemption of Gross Interest from Tax-Free Securities under Section 10(15):
The assessee claimed exemption on gross interest from tax-free securities. The Assessing Officer allowed only net interest as exempt. The Commissioner of Income-tax (Appeals) found that the investments were made from interest-free funds, thus no disallowance under section 14A was warranted. The Tribunal upheld this view, confirming that exemption under section 10(15) is on gross interest.

4. Deduction of Bad Debt Written Off under Section 36(1)(vii):
The Tribunal upheld the Commissioner of Income-tax (Appeals)'s direction to allow the deduction for bad debt written off, referencing multiple decisions against the Revenue on this issue.

5. Deduction Independent of Section 44C:
The Tribunal confirmed the Commissioner of Income-tax (Appeals)'s direction to allow a deduction of Rs. 48,60,008 independent of section 44C, following precedent from similar cases.

6. Taxability of Income at a Higher Rate for Non-Resident Companies:
The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision to tax the assessee's income at the higher rate of 55% applicable to non-resident companies, consistent with previous Tribunal decisions against the assessee.

7. Taxability of Interest Received on Intimation under Section 143(1)(a):
The Tribunal held that interest on income-tax refund under section 244A is assessable in the year it is granted, not when the assessment attains finality. The Commissioner of Income-tax (Appeals)'s direction to tax only the finally determined interest was upheld, with the Tribunal clarifying that any subsequent reduction in interest should be rectified as per the Special Bench decision in Avada Trading Co. P. Ltd.

8. Taxation of Interest and Commission Received from Head Office/Branches:
The Tribunal followed the Special Bench ruling in Sumitomo Mitsui Banking Corporation, holding that interest/commission from head office/branches cannot be taxed due to mutuality. The case was remanded to the Assessing Officer to exclude such interest/commission from taxable income and also disallow the corresponding interest expense.

9. Charging of Interest under Section 234B:
The Tribunal noted that the issue of charging interest under section 234B is consequential and disposed of it accordingly.

Conclusion:
Both appeals were partly allowed, and the cross-objection was dismissed. The Tribunal's decisions were based on legal precedents and detailed examination of the facts, ensuring consistency with established judicial principles.

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