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TMI Blog2008 (10) TMI 252X X X X Extracts X X X X X X X X Extracts X X X X ..... ing attractive rates of interest for obtaining foreign currency deposits from NRIs to meet "balance of payment" situation ofIndia. To mobilise such deposits the assessee set up NRI counters outsideIndiafor soliciting such deposits and incurred expenses. The AO rejected this claim on the ground that (1) the expenses are not reflected in the appellant's Indian books of accounts and (2) the expenditure is in the nature of head office expenses in respect of which deduction under s. 44C has been allowed. Relying on the decision of Calcutta High Court in the case of UCO Bank vs. CIT (1993) 114 CTR (Cal) 123 : (1993) 200 ITR 68 (Cal) the disallowance was made. The learned CIT(A) held that similar issue arose for asst. yr. 1995-96. In the said year it was held that expenses with reference to different centres for mobilisation of deposits from NRIs could not be related to head office expenses. The expenses are incurred for the appellant's banking business and are allowable under s. 37 of the Act. The assessee has also filed certificate from auditor, M/s KPNG on the basis of review of accounts. On consideration of above the learned CIT(A) held as under: "3.3.1 On an examination of the natu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xclusively for the purpose of business of Indian PE and at the same time are not in the nature of head office expenses which are otherwise allowable under s. 44C of the Act. Therefore, the finding is to be arrived at every year before holding that the expenditure is to be allowable. He submitted that the expenses were incurred at Dubai by Dubai branch and therefore, the expenses are deductible from income ofDubaibranch and not Indian branch. Such expenses were never reimbursed by Indian branch of either toDubaibranch or to the head office. The income has to be computed subject to regulation of the domestic law as provided in art. 7 of Indo-UK Double Taxation Avoidance Agreement (DTAA). The expenses are on estimate basis. This shows that they are not actual expenses but estimate. There is no relationship between business of PE inIndiaand that inDubai. Such expenses are neither considered in accounts nor subject to tax audit as required under s. 44AB of the Act. In a way the expenses not recorded in the books of accounts should be considered as unexplained expenditure and to be added under s. 69C of the Act. The approval from RBI is for raising deposits from non-residents but computa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the file of the AO. The assessee shall furnish details as to what were the deposits raised and how the same were brought intoIndiain respect of business carried on inIndia. The AO shall also examine the details of expenses and the basis of allocation of such expenses for considering allowability of the same. The matter is accordingly restored back to the file of the AO for re-examination. If it is found that the deposits raised abroad from NRI were accounted by the Indian branches and are treated as deposits from NRI on which even the interest is payable by Indian branches, the same may be allowed as expenses subject to satisfaction as regards allocation of the same. The assessee shall file necessary details in this regard. 7. Ground No. 2 in assessee's appeal and ground No. 3 in Revenue's appeal is in respect of depreciation on let out properties disallowed by the AO. The assessee declared rental income of Rs. 44.29 lacs in respect of 5 properties situated inIndia. After claiming deduction as per s. 24 of the Act, net income from house property was declared. The AO noted that while computing profit of the business, depreciation in relation to building given on rent has not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l on this ground is, therefore, partly allowed." 9. The learned counsel for the assessee submitted that on principle the learned CIT(A) is justified in holding that depreciation in respect of let out properties is not allowable when the income is computed under the head "Income from house property". However, she submitted that the property being too old, the WDV of such asset on which depreciation was claimed which is part of claim under s. 32 is not discernible. Considering the rental income received as also the age of the property, the value of such property itself being too low, the disallowance cannot be as high as Rs. 35 lacs. She alternatively submitted that the income from house property be taxed as business income, the claim of repairs under s. 24 be withdrawn and the claim of depreciation be allowed. This is one way to end litigation as the assets being too old and ever since the depreciation is allowable on block of assets since 1989, since WDV of such assets is not separately available instead of allowing notional expenses towards 1/5th of ALV, the claim of depreciation be allowed. 10. The learned Departmental Representative on the other hand, submitted that the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 14,37,64,264 being excess provision of doubtful debts (old account recredited). The assessee added back a sum of Rs. 9,49,02,492 as provision for bad debts (old account) being not allowable while computing total income. At the same time the amount credited to P L a/c of Rs. 14,37,64,264 was reduced from the profit for arriving at total income. The AO was of the view that total provision for bad and doubtful debts credited was for a sum of Rs. 17,60,25,983 and at the same time it had credited an amount of Rs. 14,37,64,264 as excess provision to the P L a/c recredited. The net effect is that only a net provision of Rs. 3,22,61,719 was debited to the P L a/c as provision for bad and doubtful debts. The assessee has claimed deduction under s. 36(1)(viia) amounting to Rs. 8,11,23,491. However, under s. 36(1)(viia), the amount allowable being 5 per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) to the extent provision for bad and doubtful debts made. Since the provision made is only to the extent of Rs. 3,22,61,719 which is less than 5 per cent of the total income, the deduction is to be restricted to Rs. 3,22,61,719. Accordingly, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed twice. This position is not correct. The recoveries that are made now form part of the income of the appellant in the year in which they are received. These recoveries are not out of the provisions created in earlier years, which were added back, but out of the amount of provision for bad debts allowed to the appellant under s. 36(1)(viia) in those years. When any recovery is made out of the provision allowed to the. appellant under s. 36(1)(viia) in earlier years or a debt becomes goods, the amount recovered or considered recoverable has to be included in the total income. In this case it is clear from the appellant's explanation that it has treated all its recoveries of Rs. 14,37,64,264 as part of the provisions that were added back in the earlier years. In this manner any income from recoveries made out of bad debts does not get included in its income in the year of receipt. It is for this reason that the AO has taken the net position to see the position emerging in the assessment year under consideration. I therefore find merit in the AO's arguments and consider it unnecessary to interfere in the matter. Appeal on this ground therefore fails and is dismissed." 15. The lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions as mentioned in above para totalling to Rs. 17,60,25,983. The assessee also credits to the P L a/c a sum of Rs. 14,37,64,264 as excess provision in respect of bad and doubtful debts. The excess provision written back is in respect of provision no longer required. If the account has actually turned bad, the assessee would have credited the account of borrower and debited the provision account but would not have credited the P L a/c. Credit entry in P L a/c implies that the same was either in respect of provision for bad debts or provision made under s. 36(1)(viia) no longer required. In a way the assessee admits that the provision required for bad and doubtful debts is only net of debit and credit i.e. Rs. 3,22,61,719. Hence, under s. 36(1)(viia) the claim cannot exceed such sum of Rs. 3,22,61,719. Accordingly, the order of the learned CIT(A) needs no interference. 18. Next ground of appeal by the assessee is against disallowance of a sum of Rs. 13,71,749 in respect of travelling expenses made under r. 6D. As per tax audit report, obtained as required under s. 44AB, the auditor worked out the travelling expenses, disallowable under r. 6D amounting to Rs. 68,02,288. Thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding anything contained in s. 37(1), any expenditure incurred in connection with travelling by an employee shall be allowed only to the extent and subject to such condition, if any, as may be prescribed. Rule 6D prescribes limits for deductibility of travelling expenses/allowance. The question to be decided is as to whether the expenses are in connection with travelling or is in respect of training, The primary purpose of incurring expenses by the assessee was for training their employees at a place other than their regular accommodation. Therefore, the assessee hired the rooms in a hotel and the employees were staying at such place for training purpose. The expenses were therefore, not in connection with travelling but in connection with training of employees. Hence, provision of s. 37(3) in respect of such expenses cannot be invoked. If provision of s. 37(3) cannot be invoked, the limits prescribed in r. 6D for allowability thereof also cannot be applied. Since there is no dispute that the room rent was in respect of employees staying at a place which was for training purpose, the same cannot be disallowed by invoking s. 37(3) r/w r. 6D of the IT Rules. We, therefore, delete the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OC) were exempt under s. 10(15)(iv)(c) and (f) of the Act in view of approval given by the Ministry of Finance. It was only on comparison of the approval certificate issued by ECB Division of Ministry of Finance, as available in the return with the exemption claimed that the AO found that the claim of fees earned was working out to be more than that covered by the certificate produced before him. He, therefore, disallowed the balance amount after allowing as exempt fees upto 0.0625 per cent of US $ 150 million. This resulted into disallowance of Rs. 1,21,18,234. 31. Before the learned CIT(A), it was contended that the loans to IOC were covered under the provisions of s. 10(15)(iv)(f) and (c). The loans were approved by the Government of India. Inadvertently, the assessee omitted to file all the approval certificates obtained from Ministry of Finance. Therefore, the same were filed as additional evidence. The learned CIT(A) forwarded such evidence to the AO and sought for a remand report. As per averment by the learned counsel for the assessee remand report dt.25th Oct., 2000was obtained from the AO on these certificates. The learned CIT(A) on consideration of this evidence held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficers but towards subscription and periodical fee, is allowable as such. This ground accordingly fails. 38. Next ground of appeal is against deletion of Rs. 32,20,00,000 being interest payable to the head office. 39. The background facts are that in May, 1992 certain disputes arose between assessee and National Housing Bank. The dispute was with respect to 9 account payee cheques aggregating to Rs. 506.54 crores issued by NHB and credited to the account ofBombaybased broker Shri Harshad Mehta. The RBI directed the assessee to pay the sum to NHB. The assessee borrowed from the head office and made the deposit with NHB. The interest payable thereon was claimed as deductible expenses amounting to Rs. 32.20 crores. The AO held that the liability arising due to portfolio management scheme was expenditure to be charged and debited to respective client's account and not to the P L a/c of the assessee. The AO also held that the interest paid by Indian branch to head office is not to a different entity but only to the head office and hence like inter-branch transfer. If this payment is treated as expense, the same shall become income in the hands of head office which has earned income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thUKtreaty withNetherlandsandUKare identically worded and hence as per interpretation of the Special Bench such interest cannot be allowed. 41. The learned counsel for the assessee on the other hand, relied upon the appellate order. She reiterated the submissions as made before the learned CIT(A). She also submitted that the decision of Special Bench shall not apply as a treaty withUKis differently worded than that withNetherlands. However, on a specific question from the Bench as to what is the difference between the two treaties, she fairly submitted that in fact there is no difference between the two treaties but only change in number of paras. 42. We have considered the rival submissions. The assessee borrowed the money to comply with the direction of RBI. Since the business of the assessee is regulated inIndiaunder the Banking Regulation Act, the direction of RBI is binding upon it. Since the assessee defaulted in the management of portfolio of its client, RBI directed the assessee to make the payment for which amount was borrowed from head office on which interest has been paid. Special Bench of Tribunal in the case of ABN Amro Bank held that when a branch office pays int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any other bank in India. The AO was of the view that whatever income arose in or fromIndiato any foreign branch of the assessee is also taxable inIndia. The assessee could not furnish any details; at the same time it did not deny that no income arose from the transaction inIndiaon credit cards issued by its foreign branches. The AO, therefore, estimated the income. The AO stated that commission income from cards issued by Indian branches was Rs. 9.90 crores. It would be reasonable to estimate income of Rs. 10 crores earned by foreign branches from transactions entered intoIndia. 45. Before the learned CIT(A), it was contended that the branch office inIndiawould not have any information in this regard as it was in no way involved in the transaction since the branch inIndiais neither issuing bank nor acquiring bank. It was submitted that whenever a customer transacts through a credit card, that transaction is acquired by an acquiring bank who has tie up with merchant shipment. The acquiring bank then processing the transaction with the issuing bank through Visa or Master Card network. For this transaction the acquiring bank will retain its commission. In case where the Indian bran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n is completed inIndia, the card holders receive various services like availing foreign exchange, payment to venders inIndia, etc. For this purpose banks received remuneration which is charged to the vender's establishment. Even in cases where credit cards are issued outside India but are used in India, the debt is incurred in India and the bank receives remuneration for providing funds, exchange facility etc. From every payment made by the card holder, a sum is deducted and the merchant shipment receives money after deduction of service charges. The learned CIT(A) erred in giving a finding that where the cards are issued by foreign branch but used inIndia, the debt has arisen outsideIndia. In fact, the debt on behalf of the card holders incurred inIndiaand hence service charges in respect of such services accrue inIndia. The service of providing exchange facility, cash exchange facility to venders in respect of such transaction being rendered in India are taxable in terms of s. 9(1)(vii) as well as under art. 12 of Indo-UK DTAA being in the nature of fees for technical services. 47. The learned counsel for the assessee on the other hand, reiterated the submissions made before th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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