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TMI Blog2013 (9) TMI 364X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, considering the provisions of section 14A, the learned Commissioner of Income-tax (Appeals) held that since the interest on nostro account was not taxable, the interest expenditure was also not allowable. He, therefore, made disallowance of Rs. 32,79,61,314 under section 14A of the Act. The assessee through grounds Nos. 1, 2 and 3 is aggrieved against the enhancement made by the learned Commissioner of Income-tax (Appeals) to the tune of Rs. 32.79 crores under section 14A of the Act. Before us the learned Departmental representative contended that similar issue about the taxability of interest on nostro account was there in the assessee's own case in the immediately preceding year and the Tribunal has decided the same against the Revenue. It was, however, submitted that the said interest was chargeable to tax and the Tribunal was not justified in deciding this issue against the Revenue. He made detailed submissions on the question of chargeability of interest. In the opposition, the learned senior counsel appearing for the assessee fairly conceded that the interest amounting to Rs. 13.66 crores was rightly chargeable to tax, even though the Tribunal in the preceding year took ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als). This ground taken by the Revenue about the chargeability of interest on nostro account amounting to Rs. 13.66 crores is, therefore, allowed. It is observed that the learned Commissioner of Income-tax (Appeals) made enhancement of income to the tune of Rs. 32.79 crores by computing disallowance under section 14A in respect of such interest income on nostro account, which was held by him to be not chargeable to tax as against the Assessing Officer's decision as to the chargeability of this amount. When the view of the learned Commissioner of Income-tax (Appeals) on this issue is overturned and that of the Assessing Officer is restored, interest on nostro account becomes taxable. Once the income itself is 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. Accordingly, grounds raised by the assessee against the enhancement done by the learned Commissioner of Incometax (Appeals) for Rs. 32.79 crores by invoking the provisions of section 14A are also consequently allowed. Ground No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in such tax-free bonds. He depicted this position through annexure-A to his order. In the light of these facts, it was held that no nexus was proved between the tax-free securities and interest bearing funds and on the contrary sufficient funds were there to finance the taxfree securities. Thus the action of the Assessing Officer in disallowing exemption under section 10(15) of a part of interest on tax-free securities was held to be not sustainable. The learned Departmental representative was fair enough to concede that the exemption under section 10(15) needs to be allowed on gross interest. He, however, submitted that the proportionate interest disallowed by the Assessing Officer was in a way disallowable under section 14A though this section was not there on the statute. Relying on certain decisions, it was argued that even though section 14A was not there on the statute in the period relevant to the assessment year 1997-98, but its insertion with retrospective effect from April 1, 1961 should be considered as a mandate for upholding the disallowance made by the Assessing Officer in this regard. In the opposition, learned counsel for the assessee submitted that the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e with the assessee. The learned Commissioner of Income-tax (Appeals) has tabulated this position through annexure-A to the impugned order. The learned Departmental representative could not controvert the factual position as recorded by the learned Commissioner of Income-tax (Appeals). As per this position the assessee utilised interest-free funds at its disposal for making investment in interest-free securities. The hon'ble jurisdictional High Court in the case of CIT v. Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom) has held that 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. The hon'ble jurisdictional High Court, in taking this decision, drew support from the judgment of the hon'ble Supreme Court in the case of East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 (SC). In view of the factual position as discussed by the learned Commissioner of Income-tax (Appeals) above, it becomes apparent that the assessee deployed interestfree funds for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argued before the learned Commissioner of Income-tax (Appeals) that on completion of assessment for the assessment year 199697, interest of Rs. 23,48,027 was determined as against Rs. 80,26,069 determined in intimation under section 143(1)(a). The learned Commissioner of Income-tax (Appeals) rejected the assessee's contention that interest should not be charged to tax in the year until the assessment under section 143(3) was finalised. He, however concurred with the alternate contention of the assessee that only that much interest received under section 244A can be brought to tax which is finally determined on assessment. Learned counsel for the assessee contended that primarily the interest on income-tax refund should not be charged to tax in the year in which it is granted and secondly, if at all such interest is to be charged to tax then it should be restricted to the income finally determined after the appeal effect. The learned Departmental representative supported the impugned order. Having heard the rival submissions and perused the relevant material on record we find that this issue has been decided by the Special Bench of the Tribunal in the case of Avada Trading Co. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The viewpoint canvassed by the learned authorised representative in this regard is that the interest received by the assessee on income-tax refund should not be considered as effectively connected to the permanent establishment and hence considered as independent interest under article 12 of the Double Taxation Avoidance Agreement between India and France and charged to tax accordingly. For this proposition, the learned authorised representative relied on the Special Bench order in the case of Asst. CIT v. Clough Engineering Ltd. [2011] 9 ITR (Trib) 618 (Delhi). Having regard to the facts of the instant ground it is seen that while disposing of ground No. 5 of the assessee's appeal above, we have held that interest under section 143(1)(a) is 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. The Special Bench of the Tribunal in the case of Asst. CIT v. Clough Engineering Ltd. [2011] 9 ITR (Trib) 618 (Delhi) has held that the claim for refund of income-tax cannot be said to be effectively connected with the receipts of permanent establishment and hence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omo Mitsui Banking Corporation v. Deputy DIT [2012] 16 ITR (Trib) 116 (Mumbai) to contend that such interest/commission received from head office cannot be charged to tax. He also relied on a subsequent order passed by the Mumbai Bench of the Tribunal in the case of Oman International Bank S.A.O.G. v. Asst. CIT. In this order dated June 29, 2012, the Tribunal, after considering the five Member Special Bench order in the case of Sumitomo Mitsui Banking Corpn., has held that the interest received from head office/overseas branches cannot be charged to tax. We have heard the rival submissions and perused the relevant material on record. It is apparent from paragraphs 55 and 56 of the Special Bench order that under the provisions of the Income-tax Act, 1961 the taxable entity is only one, i.e., overseas general enterprise and the permanent establishment in India is a part of that entity. It is the overseas general enterprise which has been held to be chargeable to tax in respect of income attributable to the permanent establishment in India. Once mutuality is found between overseas head office and branch in India, there can be no interest income by the Indian branch from its overseas ..... X X X X Extracts X X X X X X X X Extracts X X X X
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