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2020 (11) TMI 371 - AT - Income TaxDisallowance u/s 14A r.w.r. 8D - as per assessee he not made any investment for earning of the interest income from its H.O - HELD THAT - We find ourselves to be in agreement with the claim of the ld. A.R that the disallowance under Sec. 14A r.w Rule 8D(2)(ii) as regards the interest expenditure has to be carried out after netting of the interest paid by the assessee on borrowings and the taxable interest income earned during the year under consideration. Accordingly, we direct the A.O to recompute the disallowance under Sec. 14A r.w Rule 8D(2)(ii) in terms of our aforesaid observations. Somewhat similar claim was raised by the assessee in its appeal before the Tribunal for A.Y. 2011-12, which, however, was rejected by the Tribunal. In its case for the aforementioned preceding years, it was the claim of the assessee that the disallowance of administrative expenses under Rule 8D(2)(iii) may be restricted to the extent of 1% to 2% of its exempt income. However, the Tribunal taking cognizance of the fact that from A.Y. 2008-09 onwards disallowance under Sec. 14A was to be computed in accordance with Rule 8D, had thus, rejected the aforesaid claim of the assessee. In our considered view as there is no substance in the claim of the assessee that de hors any investment made for earning of the interest income from its H.O no disallowance was called for under Sec. 14A r.w. Rule 8D(2)(iii), we decline to accept the same. Deduction u/s 44C - attributing part of the head office expenses incurred by an assessee, a non-resident, to the business of the assessee in India - HELD THAT - Legislature in all its wisdom had provided a basis for attributing a part of the head office expenses incurred by an assessee, a non-resident, to the business of the assessee in India. For purpose for making available of the aforesaid statutory provision i.e Sec. 44C on the statute, we find, that the same was backed by the reason that it was extremely difficult to scrutinise and verify the veracity of the claims of the non-resident assessee‟s carrying on any business or profession in India, as regards their head office expenses attributable to such business or profession in India - unable to concur with the view taken by the lower authorities that the absence of the head office expenses attributable to its business in India, in the audit report or the notes to accounts of the Indian branch would therein render it ineligible to claim the deduction under Sec. 44C - Assessee had rightly claimed deduction of 5% of the adjusted total income , as the same is lower than the amount of the head office expenditure incurred by the assessee as is attributable to its business in India - No favour with the view taken by the lower authorities, therein set aside‟ the order of the CIT(A) and direct the A.O to allow the assessee‟s claim for deduction under Sec. 44C Disallowance u/s 14A - A.Y. 2010-11 - Whether no exempt income has been earned or received by the Assessee? - HELD THAT - Amount of the disallowance under Sec. 14A is liable to be restricted to the extent of the exempt interest income. Our aforesaid view is fortified by the judgments of the Hon ble High Court of Delhi in the case of JCIT Vs. Joint Investments Pvt.ltd. 2015 (3) TMI 155 - DELHI HIGH COURT and Cheminvest Ld. Vs. CIT 2015 (9) TMI 238 - DELHI HIGH COURT - Accordingly, in terms of our aforesaid observations, the A.O is directed to restrict the disallowance under Sec.14A to the extent of the amount of the exempt income of the assessee for the year under consideration.
Issues Involved:
1. Applicability of Section 14A of the Income Tax Act, 1961. 2. Denial of deduction under Section 44C of the Act. 3. Applicability of transfer pricing provisions for transactions between the branch and its Head Office (HO). 4. Adjustment of interest received and paid between the Indian branch and its HO. Detailed Analysis: 1. Applicability of Section 14A of the Income Tax Act, 1961: The CIT(A) held that Section 14A is applicable to the interest received by the branch from its HO, despite the interest not being exempt income. The assessee argued that no expenditure was incurred for earning this interest, and thus, Section 14A should not apply. The Tribunal noted that previous decisions in the assessee's own case for earlier years had established that interest received from the HO is not taxable, but the provisions of Section 14A would apply to such exempt income. The Tribunal directed the AO to recompute the disallowance under Section 14A after netting the interest income and expenditure, aligning with the decisions of the Hon’ble High Courts in similar cases. 2. Denial of Deduction under Section 44C of the Act: The AO disallowed the assessee's claim for deduction under Section 44C, stating that the expenses incurred by the HO were not clearly attributable to the Indian branch. The Tribunal found that the lower authorities misinterpreted Section 44C. The Tribunal emphasized that the deduction of HO expenditure attributable to the Indian business is allowable irrespective of entries in the books of accounts. The Tribunal directed the AO to allow the assessee's claim for deduction under Section 44C, as the claimed deduction was lower than the actual HO expenditure attributable to the Indian branch. 3. Applicability of Transfer Pricing Provisions for Transactions between the Branch and its HO: The CIT(A) upheld the AO's action of applying transfer pricing provisions to transactions between the branch and its HO, treating them as separate entities. The assessee contended that the branch and HO are the same entity. The Tribunal did not provide a separate detailed analysis on this issue, implying that the previous findings and legal interpretations were upheld. 4. Adjustment of Interest Received and Paid between the Indian Branch and its HO: The AO made adjustments to the interest received and paid between the Indian branch and its HO, applying transfer pricing provisions. The Tribunal noted that the interest income received from the HO is not taxable, but disallowance under Section 14A is applicable. The Tribunal directed the AO to recompute the disallowance under Section 14A after netting the interest income and expenditure. Separate Judgments: For A.Y. 2010-11, the Tribunal noted that the interest income received by the assessee from its HO was minimal. The Tribunal directed the AO to restrict the disallowance under Section 14A to the extent of the exempt income, aligning with the judgments of the Hon’ble High Courts in similar cases. The Tribunal also noted that the assessee's concession for not pressing other grounds of appeal was based on the minimal amount of exempt income, which should not prejudice the assessee's alternative claims in future. Conclusion: The appeals filed by the assessee were partly allowed. The Tribunal directed the AO to recompute the disallowance under Section 14A after netting the interest income and expenditure, and to allow the deduction under Section 44C as claimed by the assessee. The Tribunal's decision aligns with previous judicial pronouncements and provides clarity on the application of Sections 14A and 44C in the context of transactions between a branch and its HO.
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