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TMI Blog2012 (11) TMI 499X X X X Extracts X X X X X X X X Extracts X X X X ..... oner of Income-tax, Special Range 32, Mumbai [hereinafter referred to as the 'learned Assessing Officer'], on the following grounds: 1. In upholding the disallowance of expenses amounting to Rs. 121,802,048 incurred at the head office directly in relation to the Indian branches. 2. In upholding the disallowance of expenses amounting to Rs. 54,243,810 incurred for solicitation of deposits from non- resident Indians. 3. In upholding the disallowance of Rs. 40,196,300, being an estimate by the learned Assessing Officer of the expenditure incurred by the Appellant for earning interest on tax free bonds. 4. In upholding the disallowance of Rs. 5,253,361, being an estimate by the learned Assessing Officer of the expenditure incurred by the Appellant for earning interest on foreign currency loans. 5. In upholding the disallowance of Rs. 4,257,712, being an estimate on a notional basis by the learned Assessing Officer dividend income. 6. In upholding the disallowance of the exemption claimed in respect of interest income earned on funds placed with foreign branches amounting to Rs. 296,723,640 and the offer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 6022/Mum2000, A.Y. 1997-98. "2. First ground of the assessee's appeal is against the confirmation of disallowance of expenses amounting to Rs. 6,39,13,217 incurred for solicitation of deposits from non-resident Indians on the ground that such expenses were covered by the provisions of section 44C of the Income-tax Act, 1961 (hereinafter called the 'Act') and should, therefore, be allowed as deduction in the manner and to the extent provided in that section. The second ground is against the confirmation of disallowance of expenses amounting to Rs. 13,50,87,275 incurred at the head office directly in relation to Indian branches on the ground that such expenses were covered by the provisions of section 44C and should, therefore, be allowed as deduction in the manner and to the extent provided in that section. 2.1 Briefly stated the facts of these two grounds are that the assessee, a non-resident banking company, claimed deduction of head office expenses and NRI expenditure amounting to Rs. 13.50 crore and Rs. 6.39 crore respectively in relation to the Indian branch. The assessee was called upon to explain as to why these expenses be not covered u/s 44C and hence disallowed as was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present case because here the expenditure is allocated and not exclusive. In principle, we are in full agreement with this contention that the judgment in the case of Emirates Commercial Bank Ltd. (supra) can operate for allowing deduction in full u/s 37(1) where the expenditure is exclusive. In a case of allocated expenses, the amount can be considered only u/s 44C. The Mumbai bench of the tribunal in the case of ADIT (I.T.) v. Bank of Bahrain & Kuwait [2011] 44 SOT 693 (Mum.) has canvassed similar view by holding that the exclusive expenses incurred by the head office for Indian branch are outside the purview of sec. 44C and only common head office expenses are governed by this section. There can be no quarrel over this proposition of law. But the fact of the matter is that the expenses which are subject matter of ground nos. 1 and 2 are exclusive and not common. It is amply borne out from the assessment order, where the AO has reproduced the reply filed by the assessee stating that these expenses were exclusive. Relevant part of such contention advanced on behalf of the assessee has been extracted verbatim in para 2.1 of this order. The AO has no where controverted this sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was determined by a mathematical exercise at Rs. 7.25 crore. After reducing the so calculated proportionate expenditure of Rs. 7.25 crore from the gross tax free interest, the exempt income u/s 10(15)(iv) was determined at Rs. 2.66 crore. The learned CIT(A) observed that there was no indivisible business carried on by the assessee in respect of such bonds from which tax free income was earned. Relying on the judgment of the Hon'ble Supreme Court in the case of Rajasthan State Warehousing Corporation v. CIT [(2000) 242 ITR 450 (SC)], the learned CIT(A) held that there was no justification for making the disallowance of Rs. 7.25 crore. The Revenue is aggrieved against this finding of the learned CIT(A). 4.3 We have heard the rival submissions and perused the relevant material on record. Insofar as the question of exemption u/s 10(15)(iv) is concerned, we find that the relevant provision clearly refers to the exemption in respect of 'interest payable by any public sector company in respect of such bonds or debentures and subject to such condition.........'. The crucial words used in this provision are 'interest payable' in respect of the bonds or debentures etc. as notified by the Ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be deductible in arriving at the taxable profit of the business notwithstanding that the interest earned by the bank on tax free securities could not be taxed. It was stated that the facts of the instant case are similar to those considered and decided by the Hon'ble Supreme Court. The learned AR submitted that no specific ground has been taken by the Revenue for sustaining any disallowance u/s 14A and as such it was too late in the day for the Revenue to request for sustaining disallowance under this section. Without prejudice to such submissions and taking his argument to next level, it was submitted that where exempt income is earned from securities held as stock-in-trade, no disallowance can be made u/s 14A as the income from such securities is only incidental to the holding of shares. For this proposition he relied on the judgment dated 14.06.2010 of the Hon'ble Kerala High Court in the case of CIT v. Smt. Leena Ramachandran [(2011) 339 ITR 296 (Ker.)]. When the attention of the ld. was drawn towards the judgment of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. DCIT (supra) and the special bench order in the case of ITO v. Daga Capital Managemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer on the ground that the proportionate expenditure for earning tax free income cannot be allowed as deduction, in a way he applied the same spirit as is there in section 14A. Even though there is no reference to section 14A in the ground taken by the Revenue, which naturally could not have been possible because of this provision being inserted later on, but challenging the deletion of proportionate expenditure in relation to exempt income in a wider sense amounts to requesting for the sustenance of disallowance u/s 14A itself. No material has been placed on record to indicate that the view taken by the co-ordinate bench in the case of Dresdner Bank AG (supra) has been modified or reversed by the Hon'ble jurisdictional High Court. Respectfully following the precedent, we hold that recourse to the provisions of section 14A for making disallowance of proportionate expenditure incurred for earning exempt income, has been validly taken on behalf of the Revenue. 4.6 We now proceed to deal with the arguments put forth by the learned AR on the non-applicability of section 14A. First part of his submissions was devoted to relying on the judgment of the Hon'ble Supreme Court in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 14A in the light of the above referred three Supreme Court judgments granting deduction of interest u/s 36(1)(iii) incurred in respect of borrowings utilized for making investments resulting into exempt income, against the taxable income on the theory of composite basis. In this case, the Special Bench has held that these judgments were rendered at time when the provisions of section 14A were not there and as such the insertion of section 14A has diluted their mandate. The special bench has also held that this section applies to all the heads of income and aims at disallowing expenditure incurred in relation to income which does not form part of the total income even though such expenditure may be allowable under any other provisions such as section 36(1)(iii). It has further been held in this case that provisions of section 14A are applicable with respect to the dividend income earned by the assessee engaged in the business of dealing in shares and securities, on the shares held as stock-in-trade. Insofar as the computation of disallowance u/s 14A is concerned, the Special Bench sent the matter back to the file of A.O. for computing the disallowance as per rule 8D. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utilised for acquisition of shares of the company under the control of the assessee, she contended that the utilisation of the borrowed funds was for the business purpose entitling her to deduction of interest under section 36(1)(iii). The Assessing Officer disallowed the claim of interest. First appeal was dismissed confirming the assessment. The Tribunal relying, inter alia, on decision of the Supreme Court in S.A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC) substantially allowed the claim, but made a disallowance of Rs. 2 lakhs, being the interest stated to be attributable to the dividend income of Rs. 3 lakhs. Against this order, the Revenue preferred an appeal before the Hon'ble High Court. Reversing the order of the Tribunal and restoring the disallowance made by the AO, the Hon'ble High Court observed that any expenditure incurred for earning any income which is not taxable under the Act, is not an allowable expenditure. From the facts of the this case, it is evident that the assessee therein borrowed funds for acquiring shares of the company under its control claiming it as a business purpose. The said 'business purpose' was not denied either by the Hon'ble High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trade. What is provided in the first sentence is that the assessee would be entitled to deduction of interest under section 36(1)(iii) of the Act on the borrowed funds utilised for the acquisition of shares only if shares are held as stock in trade, which arises only if the assessee is engaged in trading of shares. It is obvious that these observations are in the context of allowing deduction u/s 36(1)(iii) and not for making disallowance u/s 14A. The provisions of section 14A come into play only when there is some exempt income. In these observations it has been nowhere said that the disallowance u/s 14A will not be made in respect of exempt dividend income arising from the shares held as stock-in-trade. It is the second sentence, which refers to the receipt of exempt dividend and mandates the making of disallowance under section 14A. 4.10 Be that as it may and without prejudice to above finding, it is seen that the Hon'ble High Court in this case was confronted with a question of disallowance in a situation in which dividend was earned from the shares held for business purpose, which has been decided against the assessee. So the ratio decidendi of the judgment is this disallowan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock in trade, the operation of section 14A shall cease. 4.13 Further, the ld. AR failed to point out, after thoroughly going through the judgment in Godrej & Boyce Mfg. Co. Ltd. (supra), that reference in this case has been made to compute disallowance u/s 14A only in respect of shares held as investment and not as stock in trade. In that view of the matter, the obvious conclusion which follows is that the decision of the Special Bench in the case of Daga Capital Management Pvt. Ltd. (supra), which has been referred to at several places in this judgment, about the applicability of the provisions of section 14A with respect to dividend income earned by the assessee from the shares held as stock-in-trade also, has not been disturbed. 4.14 We, therefore, hold that the contention raised by the learned AR for not applying the provisions of section 14A in respect of dividend income from shares held as stock-in-trade cannot be accepted. As the Assessing Officer computed proportionate expenditure for earning tax free income by certain mathematical exercise, which has also been challenged by the assessee before us, we are of the considered opinion that the ends of justice will meet adeq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgeable to tax at the normal rate. Thereafter, he computed income chargeable to tax at lower rate u/s 115A on net basis at Rs. 6.12 lac. In this way he committed an error by allowing deduction of Rs. 83.90 lacs twice, firstly, by not adding it to the total income and then by specifically computing income u/s 115A on net basis. Unaware of the overall effect of the AO's action, the assessee challenged the computation u/s 115A made by the AO on net basis, before the ld. CIT(A). The ld. first appellate authority decided this issue in assessee's favour by holding that the provisions of section 115A apply on gross income. The Revenue has accepted the finding of the ld. CIT(A) on the question of taxability of the gross amount for the purposes of applying lower rate of taxation. It is evident from the language of the ground reproduced above and also the arguments put forth by the ld. DR that the Revenue now wants that the expenses of Rs. 83.90 lacs should not be allowed as deduction against the income chargeable to tax at the normal rate. In view of the above discussion it is discernible that the issue of not allowing deduction of such expenses against the income chargeable to tax at the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst the income liable for tax at regular rates. 5.6 We are not convinced with the submissions made on behalf of the Revenue. It is undisputed that the Revenue is aggrieved against the allowability of expenditure incurred in respect of earning dividend and interest income liable to tax at special rate u/s 115A, against the income chargeable to tax at normal rate. It is not a case and cannot be that such dividend and interest income are not at all chargeable to tax. The contention which has been made is that the expenses incurred by the assessee in respect of income liable to tax at special rate u/s 115A should not be allowed as deduction against the income chargeable to tax at normal rate. This contention, in our considered opinion, is devoid of merits. The judgment of the Hon'ble Supreme Court in Rajasthan State Warehousing Corporation (supra) is authority for the proposition that if an assessee is carrying an indivisible business then the entire expenditure including that which was incurred for earning the tax free income would be a permissible deduction. The legislature introduced section 14A with an intention to set at naught the ratio of this and such other judgments by pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee to explain as to why the interest received from the funds placed by the assessee with its overseas branches should not be assessed as income and not being satisfied with the submissions of the assessee, the AO held that assessee is covered by section 9(1)(v)(c) of the Act as the interest is paid by the head office for carrying out the smooth business operations in India, therefore, interest income earned by the assessee from its head office is taxable in India and in this manner a sum of Rs. 29,48,13,653/- was added to the income of the assessee. Ld. CIT(A) has confirmed the disallowance and the assessee has raised the aforementioned ground. 7. It was submitted that this issue is covered in favour of the assessee by the decision of ITAT in assessee's own case for A.Y. 1991-92. To support such contention a copy of the decision dated 28/02/2007 in ITA No. 2770/Mum/1996 & 2439/Mum/1996 was filed, wherein the issue has dealt by the Bench from para 28 to 35. The ground raised by the revenue on this issue and the facts narrated in the said order are as under:- "28. Ground No. 13 raised by the Revenue, reads as under: "On the facts and in the circumstances of the case and in law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of a foreign enterprise payable to head office and/or other branches outside India is allowable deduction and if so, whether the provision of Section 40(a)(i) is attracted in respect of such payment/provision?" At the outset, it is pointed out that in the case before the Special Bench, there existed treaty between India and Netherlands. However, for the reasons given by the Special Bench in Para-25, it was held that provisions of treaty did not apply to the dis-allowability of interest paid to Head Office while computing the income of the PE/Indian branches of the bank and, therefore, the question whether such interest is to be disallowed or not has to be considered with reference to local law. Considering the legal position under the local law in Paras-18 to 24 of its judgment i.e. the decision of the apex court in the case of Sir Kikabhai Premchand 24 ITR 506, the decision of Calcutta High Court in the case of Betts Hartley Huett and Co. Ltd. 116 ITR 425, the decision of Allahabad High Court in the case of Ramlal Bechai Ram 14 ITR 1 and various decisions of the tribunal, it was held in para 25 as under: "Looked at from that point of view we are of the opinion that law and e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee to its other wing or so to say by one hand to another. The tax is to be deductible under Chapter XVII-B of the Act and in case of a payment to non-resident it is section 195 of the IT Act. This section provide that "Any person responsible for paying to a non-resident not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head 'Salaries' shall at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode whichever is earlier deduct income tax thereon at the rates in force. The Branch/PE of the assessee in India is not a person in legal terminology. The person is the Corporate Body ABN Amro Bank NV and not its Branches or the PE. This is also evident from the fact that assessment in this case is made on the Corporate Body ABN Amro Bank NV and not on its Branch or PE. We, therefore, find force in the assessee's contention that the provisions dealing with deduction of tax at source u/s 195 presupposes the existence of two distinct and separate entities which is absent in the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench Division. It is surprisingly to note that in Para-22, it agreed to the legal position that in case of foreign company, taxable unit under the Income Tax Act, 1961, is the foreign company and not its Branch or PE in India as apparent from the following observations: "This elementary analysis makes it clear that under the Income Tax Act, so far as foreign companies are concerned, taxable unit is a foreign company and not its branch or permanent establishment in India, even though the taxability of such foreign companies is confined to (i) an income which accrues or arises in India or is deemed to accrue or arise in India and (ii) an income which is received or is deemed to be received by or on behalf of such foreign company." But in Para-24, it took contrary stand by observing as under: "The only way, in our humble understanding, it can be so done is by treating the India PE as a fictionally separate profit center vis-à-vis the German GE. The very concept of computation of PE profits is created as a fiction of tax law in order to demarcate tax jurisdiction over the operations of a company in a country of which it is not a tax resident. Unless the PE is treated as a se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the local law i.e. the provisions of Income Tax Act, 1961 which would be applicable. Therefore, following the decisions of Special bench, it is held that income received/receivable by the Indian branch from head office is not chargeable to tax. The order of learned CIT(A) is therefore, upheld on this issue." 8. The Id. AR stated not to have any objection if the PE and the GE are treated as one, meaning thereby, that neither any deduction is allowed for the interest paid to HO or foreign branches nor income is recognized in respect of the interest earned in transactions between the HO and PE. It was submitted that the tribunal, in an earlier year, in its own case has held so following the special bench order in the case of ABN Amro Bank NV v. Asstt. DIT [2005] 97 ITD 89 (Kol.)(SB). The Id. DR did not raise any objection to it. In view of the above rival but common submissions, we hold that no deduction be allowed for interest paid to HO at Rs. 19,09,987 and at the same time no income can be taxed on account of interest earned from HO amounting to Rs. 29,67,23,640. This ground is, therefore, partly allowed. 9. Ground No.7. This issue has been discussed by the AO at page 30 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, which is applicable in the case of income of Public Financial Institutions, Public Companies etc. and it will be relevant to reproduce the relevant part of the said section. "43D. Notwithstanding anything to the contrary contained in any other provision of this Act,- (a) in the case of a public financial institution or a scheduled bank or a State financial corporation or a State industrial investment corporation, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed23 having regard to the guidelines issued by the Reserve Bank of India in relation to such debts; (b) ........................................................................shall be chargeable to tax in the previous year in which it is credited by the public financial institution or the scheduled bank or the State financial corporation or the State industrial investment corporation or the public company to its profit and loss account for that year or, as the case may be, in which it is actually received by that institution or bank or corporation or company, whichever is earlier." Referring to the aforementioned provision it was submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istence/operation as on 31/3/2005 as merged/renamed/closed thereafter and at Sl. No. 9 in the said point assessee having eight branches has been merged with Standard Chartered Bank w.e.f. 5/3/2008. Thus it was submitted by Ld. A.R that assessee is a Scheduled Bank. 14. Ld. D.R further submitted that assessee had credited the interest in its books of account and, therefore, AO as well as Ld. CIT(A), both are correct in rejecting the claim of the assessee. 15. We have carefully considered the rival submissions in the light of the material placed before us. The provisions of section 43D of the Act have already been reproduced above. For the year under consideration assessee is a Scheduled Bank. Section 43D of the Act is special provision in the case of income of public financial institutions. It is not even the case of AO that the policy adopted by the assessee with regard to categories of bad or doubtful debts is not in accordance with the guidelines prescribed and issued by Reserve Bank of India in relation to such debts. Therefore, the incidence of taxation of interest on such debts will be either when the same is credited to the P&L Account for that year or in the year in which ..... X X X X Extracts X X X X X X X X Extracts X X X X
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