2017 (4) TMI 121 - AT - Income Tax

Disallowance of portfolio management expenses and interest charges (called as safeguarding charges) claimed deductible under section 57 - Held that - There is reasonable evidence of the expenses having been incurred as copies of related bank documentation is placed on record before us. When the assessee is earning income from foreign securities held by its portfolio managers abroad, and duly offering it to tax as income from other sources , the safekeeping and administration fee, paid in respect of such securities to its portfolio managers, cannot be declined deduction under section 57(iii). The nexus between earning of dividend and interest income and incurring of these expenses is clear, and since, in our opinion, these expenses are incurred for the purposes of earning income taxable as income from other sources , the deduction for expenses is duly admissible under section 57(iii) of the Act. We, therefore, uphold the plea of the assessee. The Assessing Officer is, accordingly, directed to grant deduction - Decided in favour of assessee Disallowing relief by way of tax credit claimed deductible u/s 90 - dividend income earned outside India - Indo US tax treaty - Held that - There is no scope of sweeping generalizations while computing tax credit. The tax credit computation is to be done on a case to case basis, dealing with the tax levied in the other contracting state (i.e. US) and the income in respect of which such tax is levied. As for 25% tax withholding from US dividend income, it is not the applicable withholding rate but the maximum tax withholding rate. It is, therefore, not essential that the entire US tax levy in respect of dividend income is @ 25% only. As a corollary to the this position, the actual admissible withholding under article 10 is bound to be an amount lower than 25% because in some of the cases, the applicable US tax rate could even be 15%. These factors apart, in the case before is, there are some tax deductions at rates other than 15% and 25%. We are, therefore, not inclined to accept the learned counsel s suggestion for restricting the tax credit to 25% of the dividend income, nor do we think that it is proper to examine all these evidences, in detail, for the first time at the stage of proceedings before this Tribunal. In our considered view, all these issues and evidences should be examined properly at the stage of the Assessing Officer in accordance with the scheme of the Act.

Summary

Issues Involved:
1. Disallowance of portfolio management expenses and interest charges under section 57 of the Income Tax Act.
2. Disallowance of tax credit claimed under section 90 of the Income Tax Act for dividend income earned outside India.

Detailed Analysis:

1. Disallowance of Portfolio Management Expenses and Interest Charges:
The appellant challenged the disallowance of ?1,79,506 claimed as deductible under section 57 of the Income Tax Act. The appellant argued that the portfolio management expenses and interest charges had a nexus with the overseas dividend and interest income. The CIT(A) upheld the Assessing Officer's decision, stating that the expenses had no connection with the income earned and that the claim of 25% of total expenses was arbitrary.

- Tribunal's Findings:
- The Tribunal noted that the Assessing Officer admitted the expenses were incurred for earning income but found the 25% claim hypothetical and high.
- The Tribunal found no infirmities in the invoices and letters confirming the charges from Credit Suisse and UBS.
- It was established that the expenses were related to the safekeeping and administration of securities, income from which was offered to tax.
- The Tribunal concluded that the expenses were admissible under section 57(iii) as they were incurred for earning taxable income from other sources.
- The Tribunal directed the Assessing Officer to grant the deduction of ?1,79,506.

2. Disallowance of Tax Credit Claimed Under Section 90:
The appellant claimed a tax credit of ?3,72,698 for taxes withheld on dividend income earned in the United States. The Assessing Officer denied the claim, stating that tax credit could not be given merely on TDS deducted from foreign dividend income. The CIT(A) upheld this decision, noting that some evidences did not bear the appellant's name or were not signed by appropriate persons.

- Tribunal's Findings:
- The Tribunal referred to Article 25(2)(a) of the Indo-US DTAA, which allows a deduction for income tax paid in the United States.
- It was noted that the maximum permissible tax withholding rate under Article 10 of the Indo-US DTAA is 25%.
- The Tribunal observed inconsistencies in the tax withholding rates and the aggregate tax credit claimed.
- It was emphasized that tax credit computation must be done on a case-by-case basis, ensuring the correct tax credit computation.
- The Tribunal remitted the matter back to the Assessing Officer to compute the admissible tax credit in accordance with the observations and directed the appellant to furnish requisite evidence.

Conclusion:
The appeal was partly allowed. The Tribunal directed the Assessing Officer to grant the deduction for portfolio management expenses and interest charges and to re-examine the tax credit claim for foreign dividend income in accordance with the law and the Tribunal's observations.